THE COST PERCENTAGE MYTH
If I had a nickel for every time someone asked me how to lower their bar and food cost percentage, I could have purchased my bourbon Slushee machine by now, but since nobody gives me nickels for such questions, I’ll have to be content with making my own Basil Hayden Slurpees in a blender.
Nevertheless, don’t worry pretty little head. You don’t need to give me any nickels. I am more than happy to share seven actionable steps you can implement right now to lower your bar and food cost percentage and raise your bar and restaurant profits right away.
Let’s remember that the 2nd part of this formula is the most important: increasing your profits. I find that so many owners and managers get caught up in percentages and it can actually hurt their business. Yep, you read that right. Focusing on percentage alone can hurt your business in the long-run.
Let’s take a look: if lowering your cost percentage is your #1 goal and priority, then you should just go ahead and buy and pour well liquor all the time, because it pours at about 5 – 6% on average. BAM! Problem solved. Cost % lowered. Why even pour anything else?
Thank you, and goodnight…
Nope, hold your horses right there. Problem not solved at all. Even though you are making 95% profit, the actual money you make per shot is a far more significant metric to watch for. Let’s assume you charge $5 for a well liquor shot. That means at a 95% profit margin that you’re making $4.75.
On the other hand, a shot of Grey Goose might run you 17% pour cost, making you 83% profit. Even a Chico State graduate like myself can see that 95% is better than 83%. But for premium products like Grey Goose, you’ll charge more. Let’s say you charge $8 per shot for Grey Goose, which means you’re making around $6.50 per shot.
I will cover this concept in more detail in an upcoming blog post so you can see more closely how it works, but for now I’ll assume you can understand that $1.75 more per shot is better than 12% better cost percentage. Remember: we put dollars in the bank, not percentages. Percentages don’t buy soccer cleats for your kids.
Your goal here is to find the sweet spot, because lower cost percentage overall does mean more profits.
If the whole cost percentage thing is still a bit hazy for you, you can click here to watch my video on how to calculate your bar and restaurant cost percentage and why it’s important.
Now that you’ve had a little lesson on the importance of percentages vs. profits, let’s get into how to lower the former and raise the latter.
7 STEPS TO LOWER YOUR BAR & FOOD COSTS IMMEDIATELY
STEP 1: MASTER INVENTORY MANAGEMENT
I would be even richer if I had a nickel every time I heard someone say to me, “Yeah, I know my bartenders are over-pouring a little and giving away a few drinks, but that’s just the way it is in this business.”
NO!!! NO, NO, NO, NO, NO!!!
That’s not “just the way it is in this business.” Actually, it is the way it is in this business, and that’s why 80% of them fail. If you want to succeed and soar in the bar and restaurant industry, lean forward my little dove and I’ll tell you the #1 way to lower your cost percentage and raise your profits: watch your inventory like a dog watches that tennis ball in your hand you’re about to throw. People think of the bar and restaurant industry as a service and hospitality business, and it is. But just as important: it’s an inventory business, just like 7-Eleven or Walmart or Nordstrom who all need to prevent theft to avoid going under.
Here’s some facts for you: The average mid-sized bar loses $185 per day due to bartender theft, over-pours, negligence, etc. That’s:
- $1,295 per week
- $5,500 per month
- $67,525 per year
WTF??!!! $67,525 per year in lost inventory. If you think counting your bar and food inventory and tracking your costs is too much of a hassle, you should probably stop running a business, because inventory is the heart and soul of your business and having a quality inventory management system is the only way to do it efficiently and accurately, so before you do anything else, jump on this one first.
STEP 2: RAISE YOUR PRICES
I know that your entire body probably just tightened up there a bit didn’t it? “Raise my prices? Ooooh, I don’t want to do that. People will stop coming in.”
Look, people aren’t just coming in because you have fair prices. They’re coming in because they get treated well and they love the experience. And if you don’t have many people coming in, don’t lower your prices. Start treating them well and giving them a better experience.
Before you start freaking out about raising your prices, consider this:
Let’s say that you sell 1,000 menu items per week. That includes a food dish (appetizer, main course, etc) or a drink (beer, wine, cocktail). 1,000 items per week = 143 items per day. That’s just 70 people coming in on average and ordering two items, like an appetizer and a beer. That’s it. And let’s say that 250 of those items were food dishes and 750 items were drinks.
If you raised each food menu item just $1 and each item on your bar menu just $0.50, your food revenue would increase $250 per week and your bar revenue would increase $375 per week. That’s $32,500 per year in increased revenue! And do you really think anyone is going to notice that Coors Light went from $3.00 to $3.50? Maybe, but do you think it will stop them from coming in? I highly doubt it, as long as you are….what? That’s right: treating them well and giving them a great experience.
STEP 3: CHECK YOUR PORTION SIZES
This is true for both your bar and your food items. The kitchen should be armed with ladles and utensils or any other necessary measuring device that helps them measure out standard portion sizes.
For the bar, create regimented portion sizes for shots, martinis, cocktails and wine pours. And then follow up on those standards you set with your inventory management system to make sure your bartenders are pouring accurately.
So what should your portion sizes be? So glad you asked:
- Shot/mixed drink = 1.5 oz.
- Martinis = 2.5 oz.
- Cocktails = 1.5 – 2 oz.
- Wine = 6 oz.
- Champagne = 5 oz.
If you haven’t watched my video yet on how much money you’re losing by your bartenders over-pouring just 0.5 oz., you can check it out here.
STEP 4: CHECK YOUR PRODUCT MIX
What in the hell is product mix, you ask? Simply put, product mix is what kind and how much of each ingredients you are using in each drink or food menu item. In other words, for your food menu, how many oz. of cheese are you putting on your pizzas? How many pepperonis? What kind of cheese is it? Is it low quality and cheap, or high quality and more expensive?
In the bar, what sort of liquor is going into your cocktail menu items? Do you make your Cosmos with well vodka or Grey Goose? And do you charge appropriately if you do use Grey Goose?
Are you a wine bar, or do you have a large draft beer selection? Because in general, wine pours at 25 – 35% and draft beer pours at around 25%.
The reason I ask is because cost percentage measures gross profit margin. The lower the cost percentage, the higher the profits. But remember, we can’t bank percentages, so we want to sell the most profitable items. That means you have to find that sweet spot between margin and profitability, which means you also have to find that perceived value sweet spot.
Perceived value? What in the hell am I talking about? Well, when you create your cocktail menu, try to use a quality brand name liquor, but one that isn’t too expensive. Something along the lines of Absolut. That way you can offer good quality drinks and charge plenty for them, but since you’re not putting Belevedere in your Cosmo, you don’t have to charge $12 for it. It’s the sweet spot. Decent quality for a good price for both the guests and you.
To learn more about perceived value and how important it can be, click here to watch the video: Bar Management Tips, the Power of Perceived Value.
STEP 5: BUY IN BULK
This strategy has to be used with a bit of common sense. Buying in bulk irresponsibly is one of the leading causes of this disease we call deadstock. You can learn more about the detriments of deadstock by watching this video here.
Deadstock is the unnecessary accumulation of products that you don’t need because it will take you forever to move them out, and in the meantime, you’re tying up capital and causing disorganization and a waste of space in your storage room and behind your bar.
However, if you have products that move steadily, buying in bulk can lower your cost percentage by a respectable amount. And it goes without saying that when buying in bulk, don’t be a ding dong and over-purchase on perishable items like fruits and veggies. Let’s give a quick example of the benefits of buying in bulk:
Let’s say that you normally buy 1L bottles of Jameson for $27, but by purchasing 3 cases it lowers it to $21 per bottle. If you pour 1.5 oz. shots and sell Jameson for $7 per shot, your cost percentage for Jameson goes from 17.14% to 13.33%. That’s 3.81% lower for each bottle. WHAMMO!
STEP 6: SELL OFF YOUR FREE OR DEADSTOCK BOTTLES
All those free bottles you keep accepting from your vendors? Don’t just let them sit in your storage room collecting dust and taking up space. Especially the ones that are non-flavored vodka, gin, rum, whiskey, etc. Pull them out and sell them off as well. It’s pure profit.
For any funky free bottles (i.e. pumpkin spice egg nog liqueur, or whatever), have your bartenders get creative and come up with drink specials to sell for cheap.
To move the deadstock even quicker, you can do things like:
- Shot of the week
- Wine of the Day
- Tuesday Mystery Cocktail Night
Anything you can do to move out the deadstock and earn extra profits is a smart business move.
STEP 7: CREATE A FLIGHT PROGRAM
Flight programs are a good idea for so many reasons. First and foremost, they’re exciting. People love them because they usually spend 10 minutes deciding which type of beer, wine or liquor they want.
With a flight program, they’re able to sample multiple products at relatively the same or similar cost.
TYPES OF FLIGHT PROGRAMS:
- Wine (i.e. four glasses of 2 oz. pours)
- Liquor (i.e. three different 1 oz. whiskey pours)
- Draft Beer (i.e. four glasses of 4 oz. pours)
- Appetizer Sampler
In addition, you can charge a little bit more for your flights because the cost is “hidden” in the unique portion sizes, which increases your profits and lowers your cost percentage.
For instance, let’s say your average draft beer price is $5 for a 16 oz. glass. With a flight you can give four 4 oz. pours for $7. This lowers your cost percentage by 5.76% and on a 15.5 gallon keg it raises your profits $258 per keg.
As you can see, little adjustments in multiple areas can add up in a big way at the end of each month. In a business where the average restaurant makes 3 – 6% profit after all expenses and taxes have been paid, every percentage point counts, so don’t play your hand loosely. Take control and start implementing these strategies to lower your cost percentage and start creating some breathing room with your profits.
See you next time. Make a million.