While food sales are the chief source of revenue for most restaurants, beverage sales make up an important portion of your overall profits. Liquor costs can make or break your beverage program — so regularly analyzing your business’s liquor cost percentage is essential.
All too often, liquor profits are hurt by bad habits like over pouring or underpricing. In fact, it’s estimated that bars are missing more than 25% of their liquor, wine, and beer profits.
Whether you operate a restaurant, bar, or liquor store, understanding your liquor cost percentage will help you improve your overall profit margin. Here, we’ll explore what a liquor cost percentage really is, how to find your liquor cost percentage, and tips for optimizing it to maximize profits.
What is a liquor cost percentage?
Liquor cost percentage is the ratio of what it costs to make a drink compared to the drink’s selling price. Also referred to as pour cost and beverage cost, it’s a key metric that every bar and restaurant manager should track in order to understand your profitability.
Beyond the alcohol itself, direct beverage costs include money spent on mixers, garnishes, and anything else required to make and sell drinks. At the end of the day, managing your pour cost is best for business. For instance, fancy cocktail umbrellas may be visually appealing — but you don’t want them unnecessarily eating away at profits.
You might be asking yourself: What is a good liquor cost percentage? In general, most bars and restaurants should strive for a pour cost between 18% and 24%. The average bar has a pour cost of 20%, indicating that every dollar of beverage sales generated costs the business 20 cents.
That said, the average pour cost varies for different types of alcohol — roughly 15% for liquor, 20% for beer, and between 30% and 40% for wine. That means if you run an intimate wine bar, your liquor cost percentage will differ from a dance club that focuses on cheap mixed drinks. Be sure to review the individual components of your beverage program to understand the liquor cost percentage for each type of alcohol or drink menu item you sell.
How to calculate liquor cost percentage
To manage business profitability, bar and restaurant operators should regularly review their pour cost. Aim to calculate your liquor cost percentage on a monthly or even weekly basis to monitor for and prevent serious issues like theft, as well as identify sales trends, optimize your drink menu, and test new pricing strategies as needed. You have significant control over this business metric, so take advantage of the information available to you.
To manage profits of your overall beer, liquor, wine, and even non-alcoholic beverage sales, use the liquor cost percentage formula — which simply takes your total beverage cost of goods sold (COGS) and divides that by your beverage sales over a certain period of time.
Total Liquor Cost Percentage = Total Cost of Goods Sold / Total Alcohol Sales x 100
For example, if your bar sold $5,000 worth of alcohol which generated $25,000 in sales over a specific time period, then your liquor cost percentage is 20%.
5,000 / 25,000 = .2 or 20%
You can also calculate a liquor’s cost per ounce, which can help you determine menu pricing:
Liquor Cost Per Ounce = (Container Cost / Ounces Per Container)
There are additional formulas to account for inventory not sold and individual drinks. That said, most operators opt to use their POS or inventory management software to determine their liquor cost percentage, rather than doing the math manually.
How to lower your liquor cost percentage
A high pour cost can be caused by a number of factors, such as over pouring, frequent spillage, unrecorded comps, and theft. Here are some steps your business can take to lower your liquor cost percentage and take control of your beverage profits:
1. Track weekly inventory
Inventory management entails knowing exactly what products and how much of each that you currently have in stock. Performing routine inventory on your restaurant’s liquor, wine, and beer supplies will reveal what moves quickly and what doesn’t, providing powerful insights for menu planning. It can also point out any discrepancies and potential product loss that can result from over pouring or spillage. Every dollar you have tied up in inventory is a dollar against your potential profits.
2. Prevent theft
Theft is an issue for all small businesses, both internally and externally. 75% of employees have stolen from their employer at least once, according to the U.S. Chamber of Commerce. What’s more, 30% of business failures may have resulted from employee fraud and abuse. Theft in the foodservice industry isn’t always synonymous with outright stealing — it can also mean undercharging, falsely voiding a check, and comping drinks. Aside from hiring reliable and trustworthy people, operators can monitor bartenders’ tabs and cash reserves, and communicate the consequences of theft on both your business and their employment.
3. Reduce waste
They say don’t cry over spilled milk, but what about a pint of beer? The cost of spilled bottles and complimentary drinks quickly adds. Be sure to train staff to ring up all spills and comps in the POS — if it’s significantly eating into your profits, set limits on the number of comps employees can serve.
4. Standardize cocktail recipes
It’s no secret that creative cocktails have become the hallmark of bartenders across the world. But the cost of extra ingredients adds up quickly, and can negatively impact profit margins. Create a pour policy that sets clear standards for the amount of ingredients used in each cocktail, as well as the size of the pour for wine, beer and single, unmixed liquor drinks.
5. Train your staff
Overpouring may seem harmless in the moment, but it can cost your business thousands of dollars in the long run. While pouring a drink seems straightforward, there are many factors that can impact your beverage serving efficiency. Ensure that staff members not only have the experience needed to work behind a bar, but are also prepared for unforeseen circumstances like making multiple drinks at a time or serving two customers at once. They should strive for quality and consistency as well as speed, and can use measuring tools like pouring spouts, jiggers, and others to ensure precision when making drinks.
6. Adjust menu prices
Serving draft beer is a cost-effective way to satisfy guests, as is offering wine by the glass and serving inexpensive cocktails. You want to remain competitive without losing money, so evaluate your bar’s liquor cost percentage, then price accordingly. If you find you’ve been charging lower prices for your menu items, then roll out a new set of prices in increments.
7. Switch to lower-cost suppliers
When switching suppliers, you still want to keep in mind their quality, convenience, appeal, and — of course — price. Cost is always a top consideration when you’re sourcing both food and beverages for your restaurant. Depending on your liquor cost percentage, switching to lower-cost suppliers may help you in the long run.
8. Conduct a menu engineering analysis
Restaurant owners can increase profits through menu engineering, a strategy that analyzes the profitability and popularity of each menu item. This involves breaking down the individual cost of the drinks you offer, including every ingredient. Then, categorize them by profit and popularity to determine what items you should remove, adjust, or promote — and update your menu accordingly.
Calculating your liquor cost percentage is simple as long as you maintain diligent sales and inventory records and keep your POS up to date. By regularly monitoring your pour cost, you’ll be able to test different pricing strategies and cocktail recipes to optimize profits at your restaurant, bar, or liquor store.