Liquor costs the average restaurant between 18%-24% of its budget. That's a sizable chunk! That's why understanding liquor costs is crucial for keeping your restaurant profitable.
In this blog post, we’ll show you how to calculate liquor costs in your restaurant and go over different strategies you can use to lower liquor costs and improve your bottom line.
Calculating liquor cost and liquor cost percentage
Liquor cost is the price you pay for the alcohol served at your restaurant, also known as the cost of goods sold (COGS). Knowing your liquor cost is one of the crucial restaurant metrics you need to track to make sure your business stays profitable.
You can calculate your restaurant’s liquor cost by adding up your beginning inventory for a specific period and any additional inventory purchases you made during that period, and then subtracting your ending inventory from this number.
Here’s the liquor cost formula:
Liquor cost = Beginning inventory + Purchases - Ending Inventory
Liquor cost percentage (also known as pour cost), on the other hand, is the ratio of liquor costs compared to liquor sales. You can calculate your restaurant’s liquor cost percentage by using the following formula:
Liquor cost percentage = (Beginning inventory + Purchases - Ending inventory) / Total sales
The average pour cost percentage is considered to be between 18% to 20%. If your liquor cost percentage is higher than this, you should try to reduce your liquor costs by using the strategies covered in the next section.
4 ways to lower liquor costs
Looking to lower liquor costs at your restaurant? Try these strategies
1. Negotiate pricing with suppliers
One of the best ways to reduce liquor costs is to negotiate better pricing with suppliers. Here are a few strategies you can use to increase your chances of negotiating a better price for your liquor purchases:
- Prepare a liquor sales forecast – A liquor sales forecast is a necessity for being able to negotiate pricing with a distributor. When preparing your sales forecast, make sure to include a breakdown of forecasted alcohol sales by drink category.
- Bring quotes with you – Before you attempt to negotiate, collect quotes from different suppliers. This will allow you to show that you can get a better price elsewhere unless you’re given a discount.
- Set up long-term contracts – Don’t shy away from setting up long-term contracts with suppliers. Agreeing to these types of contracts can often help you secure a better price on liquor.
2. Practice theft prevention
Bar theft can increase your restaurant’s liquor costs significantly. Some of the most common types of bar theft include giving away free drinks and overpouring.
Restaurant and bar managers can use these tactics to reduce bar theft:
- Perform weekly inventory checks – Performing weekly bar inventory checks will help you keep an eye on inventory variance levels and allow you to spot any unusual drops in liquor stock levels.
- Implement a zero-tolerance policy for theft – Let your staff know how much bar theft can cost the restaurant and explain that any instance of theft will result in termination.
- Install security cameras - Security cameras can help you notice any shady behavior. Also, simply knowing that there are cameras at the bar will make it less likely that people will steal.
3. Try to reduce waste
The cost of spilled drinks and incorrect orders can add up quickly. In order to reduce liquor costs at your restaurant, you need to reduce bar waste as much as possible.
Here are a few things you can try:
- Track spills – Start by keeping track of liquor spillage to get a better understanding of how much spills are costing you.
- Educate your staff – Educate your staff on how wasting liquor impacts the restaurant’s bottom line. Teach bartenders proper pouring technique to reduce liquor shrinkage.
- Use jiggers and precision pour spouts – Using specialized bar tools, such as jiggers and precision pour spouts, can help eliminate overpouring completely.
4. Standardize your drink recipes
Making sure all your bartenders follow the same recipes when preparing drinks is crucial for controlling liquor costs. It ensures consistency in both the cost and the quality of the drinks.
You’ll want to create recipes that outline the exact amount of ingredients used for each drink and explain to your bartenders the importance of following the recipes closely.
To create a drink recipe, you’ll need:
- The exact quantity of each ingredient used (liquor, mixers, garnish etc.)
- The glass size
- Instructions for making the drink
You’ll also want to revise your recipes every six months or so.
How to price liquor at your restaurant
Pricing liquor can be tricky. If your liquor prices are too high, fewer people will order alcoholic drinks with their meals.
On the other hand, if you set prices too low, you’ll lose out on potential profits.
You need to consider these three things when pricing liquor:
- The pour cost – Pour cost is usually the main thing you consider when determining how much to price alcoholic drinks. With the industry average for pour cost at restaurants ranging between 18% to 20%, you’ll want to make sure your pour cost doesn’t go higher than that.
- The competition – What do other similar restaurants in your area charge for specific drinks? You don’t want your liquor prices to be much higher than what competitors are charging.
- The demand – Is a particular type of liquor flying off your shelves? This might mean that it’s underpriced and that you could improve profits by increasing the price.
Here’s an easy way to set liquor prices at your restaurant:
Start by setting a target pour cost percentage. As we mentioned earlier, aiming for a pour cost of around 20% is good. This will give you a gross profit margin of 80%.
Then, calculate the liquor cost for a specific drink by dividing the cost of a bottle of liquor by the number of drinks you can make from it.
Here’s an example: let’s say you’re looking to determine the price for a glass of whiskey that costs you $30 for a 25oz bottle.
You can make about 16 drinks from a 25oz bottle, so the liquor cost per drink is going to be:
$30/16 = $1.875
Finally, to calculate the drink price, divide the liquor cost by the pour cost percentage. In our example, this would be:
$1.875/0.2 = $9.37
You can round up the price to the nearest quarter to get a price that’s more visually appealing. This will make your overall menu pricing look cleaner.
If you got this far, you now have a much better understanding of how to calculate liquor costs, as well as how to price liquor properly.
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