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Six Proven Practices to Control Your Beverage Costs

Six Proven Practices to Control Your Beverage Costs

by Joe Erickson

I have a friend who shared with me a story about a bar owner tenant he once had who wanted to renew his lease. My friend, however, was not interested in renewing the lease because the bar owner, over the course of the original term, had made conceptual changes, which resulted in an image and clientele my friend felt were not appropriate for this particular strip center.

The bar owner, having greatly improved his sales because of those changes, pleaded with my friend to renew, telling him he would pay double, even triple his current rent rate if my friend would reconsider. The bar owner said to him, "You need to understand that I have a very successful business and am making money hand over fist, even after what my bartenders steal from me!"

No Laughing Matter

This bar owner's confession, though funny in the context by which it was conveyed to me, is no laughing matter for most restaurant operators, as it is characteristic of their unending worry to prevent theft and control costs. Restaurants serving liquor, beer or wine typically include a separate bar area and employ bartenders that, unlike servers, which must

start quote. .The National Restaurant Association reports that 75% of all inventory shrinkage happens as a result of theft. And then, there is the other 25% ..end quote
ring up cocktail orders beforehand, act as their own cashier. They can take a guest's order, make it for them and then collect from them with little or no accountability. Stir in the fact a majority of their income is from tips and you end up with a temptation cocktail that's hard to say no to.

Bartender theft comes in many flavors. There is outright theft of cash in which a bartender doesn't ring up the drink but pockets the cash. Another is to give "free" alcohol in hopes of getting better tips.

And yet another is to simply steal or consume spirits without paying for them. Given the many ways a bartender can steal from you it's no wonder the National Restaurant Association reports that 75 percent of all inventory shrinkage happens as a result of theft.

So what about the other 25 percent? Theft isn't the only reason for high beverage cost. Overpouring, spills and waste, mistakes and inadequate pricing structures contribute to cost control problems too. No matter the cause, the only way for keeping these costs under control is to have proven systems in place for inventory control, training, strict service and settlement controls, cash monitoring procedures and financial reporting tools that alert you when costs spike.

Regardless of which beverage control system you adopt for your restaurant (see "Beverage Control Systems: Something Established, Something New" below), the pathway to thriving beverage profits begins with setting prices and ends with the financial statement -- and you must have systems in place for each step along the way.

Ingredient 1. Pricing

Among operators, the most frequent question is how to measure their alcoholic beverage cost percentages against industry averages. In general, the rules of thumb are:

  • Liquor, 18 percent to 20 percent.
  • Bar consumables, 4 percent to 5 percent as a percent of liquor sales (includes mixes, olives, cherries and other food products that are used exclusively at the bar).
  • Bottled beer, 24 percent to 28 percent (assumes mainstream domestic beer; cost percent of specialty and imported bottled beer will generally be higher).
  • Draft beer, 15 percent to 18 percent (assumes mainstream domestic beer; cost percent of specialty and imported draft beer will generally be higher).
  • Wine, 35 percent to 45 percent (the cost percentages of wine can vary dramatically from restaurant to restaurant depending primarily on the type of wines served. Generally,the higher the price per bottle, the higher the cost percentage will be).

The problem is this: While there is value in knowing these numbers, all too often we see operators establish their entire pricing structure based on set cost percentages -- without really knowing if these are even the correct cost percentages they should expect. When setting drink prices for specific beverage menu items you need to consider these questions:

  • How much does this item cost me to make?
  • What is the guest willing to pay for this item?
  • What are my profit expectations?
  • What changes are needed so that guest expectations are compatible with profit expectations?

Here are some best practices, systems and tools you can use to help answer these questions:

Menu cost card. This form should list all the ingredients used to make a menu item. It is particularly helpful for costing out liquor drinks. Unlike most beer and wine menu items, many liquor drinks have multiple ingredients. The cost per portion of each ingredient used is added together to arrive at the total cost to produce this menu item, including both the cost of liquor and the bar consumable cost.

Competitor price survey. One way to gauge customer price perception is to survey your competitors to see what they charge for similar bar or food menu items. Use a Competitor Pricing Survey spreadsheet to gain a sense of the market value of your menu. Once you know the value, you can tweak the pricing to reflect a balance that satisfies market perception as well as profitability.

POS programming. Your POS (point of sale) system should be programmed to track sales for each menu item. Likewise, each menu item should be tied to one of the industry-standard report groupings mentioned earlier. For even better cost control, consider adding subcategories for every different pour size within each of the report groups. For example, if you sell multiple sizes of draft beer, create a subcategory for each pour size.

The idea behind this is to make it easier to track the total volume of draft beer that was accounted for so that it can be compared with the actual

volume used for the same period. To the left is an example of sales groupings with categories by pour size. Note that bottle beer is tracked by units sold and does not need additional pour size categories. The purpose for tracking categories by pour size or units is for ascertaining the ideal usage based on recorded sales.

Ingredient 2. Purchasing and Receiving

Good purchasing and receiving practices should apply to all areas of your business. Whether it involves a delivery driver, dishonest manager or unsupervised kitchen staff, there are many ways product you pay for never even finds its way to the storeroom or walk-in cooler. Many of the following tools and best practices can (and should) be used for everything that comes through the back door.

Running inventory order guide. The order guide form is used as a tool for counting and tracking all the products that your restaurant uses and must reorder. It goes beyond a simple checklist of the products you use, containing useful information such as the vendor, current price, par level, inventory count and order history for each product. As you see in the chart below, the order guide provides an easy system for counting and keeping stock levels up to par. It also shows when stock is transferred from the locked storeroom to restock the bar each shift.

Use purchase orders. Purchase orders provide an excellent financial control to ensure that all purchases have been authorized and invoiced with correct pricing. A purchase order showing the quantity and price quoted should be completed for every vendor order. Hourly staff receiving deliveries can simply compare the invoice with the purchase order, alerting the manager of any discrepancies. Purchase orders are generated directly from the order quantities entered on the order guide.

Receiving policies and procedures. One of the most effective things you can do is to establish strict policies for receiving deliveries. Here are a few things that should be included:

  • Establish delivery times that do not conflict with busy meal periods.
  • If possible, assign hourly staff or someone other than the person ordering to accept deliveries. This provides a check-and-balance system for keeping people honest.
  • All deliveries should be visually inspected and counted for accuracy -- don't take the delivery driver's word for it.
  • Delivery doors should remain locked until needed to complete a delivery.
  • Delivery drivers should be accompanied at all times and shall have limited access to delivery area only.
  • All shortages or invoice corrections are noted immediately and signed by driver. Management should be notified any time there are discrepancies.

Maintain a daily invoice log. Once orders have been received and checked, the invoice should be placed in a designated receiving bin or file folder until it is ready to be posted to the purchasing log. At a convenient time, such as between shifts or before opening, the manager or designated entry clerk should process the invoices for that day.

Ingredient 3. Inventory Control

Once alcoholic beverages have been received, you must have good systems for tracking their movement from storage room to the bar. Here are a few tried-and-true best practices to help monitor inventory levels.

Lock up your liquor, beer and wine. A proven method for reducing theft and unrecorded sales is to keep backup inventory of liquor, beer and wine under lock and key. A separate storeroom for alcoholic beverages is the optimum situation; however, locking cages and cabinets can be added according to your space requirements.

Set bar stock par levels. Establish a fixed par level for all beverage items that will be stocked in your bar. Organization is key here. A disorganized bar or coolers makes it difficult to maintain exact stock levels. Prepare a listing of all items to be stocked along with the par level to build back to at the end of each shift.

Bar restock system. At the end of each shift, bartenders should bring to the manager all empty liquor bottles (do not allow bartenders to throw liquor empties away), and the number of each beer and wine item needed to bring the stock back to par. Never give the employees the key to the storage room and only allow management to issue the resupply stock. Use the running inventory order guide to keep track of all stock issued and of deliveries from vendors. Properly maintained, the running inventory order guide should always match the physically counted inventory. Keeping a perpetual inventory also simplifies ordering and weekending physical counts.

Weekly inventory counts/valuation. Physical inventories should be taken weekly for both the storage room and product stocked in the bar. Inventory counts should coincide with the last day of the reporting week. For most operations, Sunday works best as the end of the reporting week. Inventory levels are typically at their lowest after the weekend. Counting inventory also helps in preparing your order list for Monday. Inventory should be counted after the close of business on Sunday and before the restaurant opens on Monday.

The quantities counted should then be multiplied by the current purchase price to come up with a total for each product. The storage room totals should match the calculated on-hand count of the running inventory order guide. These totals will be used for calculating the weekly cost of sales (more on that later).

Ingredient 4. Service and Settlement

Proper pricing, purchasing and receiving practices and inventory control methods are important elements of good beverage cost control, but if you do not have systems in place to ensure that your staff are doing their part then you won't get the results you want. Service and settlement procedures should be established for the following:

Pour policy and enforcement. Owners and managers have long argued over the merits of free pour vs. the use of a jigger when pouring liquor. Regardless of which you use, you should have an ongoing training and review process to ensure that proper portion control is being achieved. You need to put in place pour standards and adopt standards for meeting them. For instance, for wine by-the-glass service we used to make the bartenders fill a wine glass with 6 ounces of water. Each time a glass of wine was poured it was done adjacent to the water example to make sure 6 ounces went out instead of 5 or 7. Draft beer service is another problem area for operators. It's not really the amount being served to the guest, but the amount that is allowed to run down the drain because of foaming issues. Restaurants waste anywhere from 5 percent to 10 percent, on average, of draft beer purchases by allowing them to simply go down the drain -- along with your profits. Temperature, air pressure and dirty beer lines greatly affect the yield you get from draft beer. Have your vendor clean and service your beer lines regularly. In many states your beer vendor is allowed to clean your lines for free.

Spill and comp sheets. Bartenders should maintain a spill sheet at all times so they can record any spills or mistakes. Spills and mistakes still increase your cost of sales but knowing what percentage is attributed to spills provides coaching and training opportunities. Likewise, keeping a log of all complimentary drinks helps to monitor the number of free drinks given by managers, owners or bartenders who are allowed some leeway to comp a drink every now and then for loyal customers. Typically the POS can be programmed to track various comps and discounts along with specific reasons for them.

Strict ticket-ringing policy. By putting in place a system in which orders must be rung up before the drink can be prepared or served, you ensure accountability and reduce the opportunity for theft. Servers should always ring their drink order before bartenders make it. As for when bartenders make drinks for their own bar customers, a policy should be set according to your particular bar environment. In extremely busy bars it's sometimes more practical and efficient for the bartender to make or serve the drink first and then immediately ring it up once served. However, allowing your bartenders to ring up the orders "whenever they feel they have a chance" can lead to mistakes and create easier theft opportunities.

Video surveillance. Video cameras can be invaluable for enforcing ticket-ringing policy. They have been used successfully to catch thieves in action, with some bartenders blatantly adding the cash sales to the tip jar. One really effective use of video cameras is to integrate them to POS stations so that sales transactions are overlaid onto the real-time video recording. This is extremely effective when you suspect your bartender of ringing items less expensive but collecting full price.

Mystery shoppers. Numerous surveys tell us that most dissatisfied customers don't complain, they just never return. Many operators use mystery shoppers to find out what's really going on in their restaurants from the guest's point of view. Another way for using mystery shoppers in the bar is to observe operational habits such as how ticket-ringing policy is being enforced, pouring practices and suspicious activity.

Customer display on POS. Customer displays are used to show the price of each item being rung and the total of the bill. Many customers will watch this process and ultimately challenge any discrepancies, providing a built-in safeguard for keeping your bartenders honest. One of the easiest ways for bartenders or cashiers to steal from you is to underring the sale in the cash register while still charging the customer the full amount. When there is not a visible display showing the amount of the sale, then the customer has no way to challenge the amount being charged, thus making it appealing for dishonest bartenders. Additionally, a printed receipt should be given to every customer.

Separate cash drawers. One of the hardest things to detect is when someone is stealing cash while multiple people have access to a given cash drawer, a common practice in many bars. Many operators defend this practice by saying they cannot afford or do not have the space to provide POS stations for each bartender needing access but you don't need separate POS terminals; most POS workstations can be configured to work with as many as four cash drawers, each assigned to a different bartender.

Fixed-amount bar banks. At the beginning of their shift, each bartender is issued a cash drawer containing a specific amount of change and currency needed for making correct change (i.e., $150, $250, etc.). If more change is needed during the shift, simply exchange larger bills for change while keeping the current cash amounts the same.

Surprise drawer counts. One of the most common ways bartenders try to earn extra money on the side is to "build the till." It's a simple process of placing all the cash they receive from customers exactly where it's supposed to go: in the cash drawer. However, every once in a while a drink or beer isn't rung up or is

start quote. .The most effective method for achieving beverage cost control is to measure your results each week.....by reviewing your cost performance each week, you discourage theft, waste and apathy...end quote
rung up at a lower price. The customer, however, is still charged full price for everything. This means more cash is going into the cash drawer than the amount of sales getting rung up on the register. Typically the bartender may use some sort of counting method such as placing a broken toothpick for every $5 or $10 they underring. To discourage this type of theft, every so often during a shift (on a surprise basis) pull a cashier's or bartender's cash drawer (swap it out with a different one) and take a register reading, which will tell you how much cash "should" be in the drawer. Count the actual cash in the drawer and if you come up with a cash "overage," you either have a problem with incompetence or someone's cheating.

No POS report access. POS stations should be programmed to disallow bartenders from running reports showing the total sales rang (cashier sales report). This practice makes it more difficult for dishonest bartenders to underring sales and pocket the difference, as explained previously. Cashier sales reports should only be taken by management.

Blind checkouts. At the end of the shift, the bartender, while under manager supervision, should count the cash and credit card receipts being turned in and recorded onto the cashier checkout form. The cash drawer bank should be restored to the amount that was issued and the remaining silver and currency turned in as a separate cash deposit along with credit card and other receipts. The manager will then add the cashier report totals to the cashier checkout form so that the bartender/cashier can complete the checkout and calculate cash over and short. Management will then count the cash drawer and the cash deposit to verify that they match the recorded amounts on the cashier checkout form. The cash drawer will then be returned to the safe or reissued to another bartender. The deposit will be added to the other cash deposits turned in during the course of the day.

Ingredient 5. Measuring the Results

There is an old business axiom that tells us we can only expect what we inspect. The most effective method for achieving beverage cost control is to measure your results each week. When problems pop up the numbers turn out to be the red flag alert. By reviewing your cost performance each week, you discourage theft, waste and apathy.

Monitor weekly inventory turnover.It's extremely important to keep inventory levels at their proper amounts. Too much product on hand often leads to waste, increased opportunity for theft, and a decrease in available cash. To calculate monthly inventory turnover you divide the cost of sales for the month by the average value of inventory on hand. For instance, if you use $9,000 per month in draft beer, and the average value of your draft beer inventory on hand is $3,000, then you are turning over your draft beer inventory three times per month (9,000 ÷ 3,000 = 3). The typically optimum range for inventory turnover in most restaurants is:

  • Liquor, 0.25-1.5 times per month (varies among concept/sales mix).
  • Bottle beer, 2-3 times per month.
  • Draft beer, 1-2 times per month (varies with number on tap/concept).
  • Wine, 0.75-1.5 times per month (varies with size of wine list/sales mix).

Weekly cost of sales analysis. To accurately calculate your cost weekly, you'll need to take inventory weekly as well. The only method for computing accurate cost of sales is to take physical inventories and then calculate the value of inventory on hand. Many operators erroneously believe that what they spend on food and beverage purchases is their cost of sales. While this may be true in the long run, for specific-period analysis it is inaccurate. Here is the correct formula for calculating cost of sales for each sales group:

Beginning Inventory + Purchases
- Ending Inventory = Cost of Sales

As explained earlier, our industry typically measures cost control in terms of percentage. To calculate the cost percentage of a particular group you need to divide the cost of sales by the sales (Cost of Sales ÷ Sales = Cost%). Operators who take inventories and calculate their cost of sales each week are far more profitable than those who don't -- taking anywhere from 2 percent to 10 percent more profit to the bottom line. By calculating the cost of sales weekly, operators can quickly identify cost fluctuation problems, giving them the opportunity to react immediately.

Weekly alcoholic beverage control analysis. Monitoring liquor, beer and wine costs by percentages helps to reveal sudden spikes and provides an early warning alert of potential problems. While this is indeed something all restaurants and bars should practice, for more precise cost measurement you should conduct a complete alcoholic beverage control analysis by comparing the ideal usage with actual usage for each of the beverage groups. The three-step process is illustrated below:

Step 1. Earlier we discussed the importance of tracking sales by pour size or units sold. We now need to record these sales to the analysis form. Ideal usage for each beverage group is calculated by multiplying the quantity sold by the pour size to arrive at the total ounces that should have been used.

Step 2. In this step, all alcoholic beverage purchases are recorded to the alcoholic beverage usage worksheet. It includes columns to record the number of units received for each size of container or bottle delivered. The form includes rows for recording the beginning and ending inventory counts for each of the cost group's inventory units. On this worksheet, ending inventory counts are subtracted from the combined sum of the beginning inventory counts (previous week's ending counts) and the purchases received that week to arrive at a total actual usage for the week.

Step 3. In the final step the variance between product sold and product actually used is calculated. Negative variances indicate the amount of product used for which no sales were made. The reasons can be attributed to overpouring, mistakes, waste or spills, unrecorded comps, or a potential theft problem. The unaccounted-for amounts are then multiplied by the average selling price to show lost sales potential.

Ingredient 6. Leadership

The success or failure of your efforts to put in place these beverage control systems largely depends on leadership. A leader must establish direction and influence others to follow that direction. The only way your management team and staff will be committed to reducing costs and preventing waste is if you are committed.To accomplish these objectives you need to properly train your staff on how and why these systems should become part of each day's routine. If you aren't already doing so, begin weekly managers' meetings to review the financial results of the weekly reports. Managers should conduct daily shift meetings with bartenders to reinforce your expectations and goals. When an employee, whether that is staff or management, does not follow the system, the error should be addressed immediately. As weeks go by, commitment and persistence will help you create a culture of beverage cost awareness that permeates throughout your staff.

 Beverage Control Systems

Something Established, Something New

All liquor-serving venues are susceptible to theft, overpours and underpours, spillage, giveaways, missed ringups and other problems that cost you significant money in the long run. Flip through the exhibitor listing for the most recent National Restaurant Association show in Chicago and you'll find dozens of companies specializing in beverage control systems. Their wide-ranging array of services include liquor-dispensing systems, inventory counting and analysis, POS-integrated video surveillance and other innovative ideas to help restaurant owners reduce shrinkage. Indeed, there are so many of these services, one wonders how restaurant operators ever managed without them; and herein lies the purpose of the main article.

While describing all these systems is beyond the scope of this feature, here is a summary of one of the most well established and well-branded among them, and a relative newcomer to the United States.

Bevinco: 20 Years' Experience

It's often said, then repeated by just about every consultant, business school graduate or enlightened manager: "That which is measured improves."

Dollars and product can vanish in any restaurant/bar because of mismanagement, waste, shrinkage, theft or simply not paying attention. There are a number of ways to control these real-life realities as the feature article mentions. Calling in outside help is another option that's open to restaurant and bar operators.

Bevinco is a 20-year-old company that began by providing installed bar-measuring devices but then switched their approach to a system that sends one of their trained and certified franchised auditors to your location each week to count, measure and weigh every container. Those measurements are entered into a unique software program, which compares them to POS (point-of-sale system) sales figures or other sales receipts. The owner then receives a percentage rating with reports, which can detail areas for improvement on things such as overpouring, overportioning, improper stock rotation leading to spoilage, vendor discrepancies, improper yielding techniques, insufficient training of staff, carelessness and possible employee theft. Count, compare, report and advice is what this service provides on a personal basis.

Bevinco claims to be able to reduce shrinkage to less than 5 percent because of its company history and programs. Holding the staff accountable creates a more efficient delivery system and the staff quickly learns that someone who's not connected to the restaurant is watching. They also know that it's a consistent program and a constant weekly reminder. Here's how it works:

The Bevinco representative and the operation's owner or manager meet when no other restaurant staff is present on site. The key is complete secrecy. The visits, usually conducted early in the morning or after closing, take place on the same day each week over a four- to six-week period and last about two to three hours depending on the size of the bar and amount of inventory to be counted (pricing also is based on these factors). A solid baseline of bar sales and inventory is then established without the employees knowing about it. Once this investigation stage is completed, a meeting is set up with the appropriate managers and bartenders where initial results and reports are shown and discussed. The objective is to make sure everyone understands the program.

This first meeting with staff is critical, and as one auditor told a restaurateur, "If you have a bartender stealing you'll find it won't be long after we start measuring they'll give you their notice soon after they learn the system is in place." At this point, additional staff training on correct pour quantities and other procedures should take place. An important part of the training is making sure that every drink, including spills, is accounted for. "Good will" drinks given to special customers must be recorded. Everything has to be counted. Another advantage of this personalized approach is that often the auditor can make suggestions and give you advice on what other area establishments are doing to control their liquor costs. It is also critical that everyone including servers and kitchen staff know that every week the liquor inventory is counted, and if the count is off management will want to find out why. Each time a report comes from the auditor, usually it is ready in less than a day, and it needs to be reviewed and discussed with the bar manager as a reminder to everyone of the goals of the program. A 5 percent or less waste result is considered to be a very good outcome. For more information, visit www.bevinco.com.

BarMaxx: New On the U.S. Bar Scene

BarMaxx has been used in Europe for several years, so it is not exactly new. That said, the system is making a debut in the United States. The system is touted by the company as an accurate, wireless, free pour liquor inventory control system, employing Web-based inventory management software, ultraprecise scales accurate to 4/1000th of an ounce), real-time surveillance hardware and mobile device-compatibility. Based on RFID (radio frequency identification) tag technology, the system works in conjunction with customer inventory management software to track your liquid assets from the time they arrive in your stockroom, to the time the last drop is poured.

BarMaxx promises to give operators control over your liquor inventory in real time, lower your inventory costs with more efficient purchasing, and let you know the status of each and every bottle of liquor in your restaurant. Not unlike the Bevinco system, the BarMaxx system operates without staff knowledge of the extent of its monitoring. In addition, the BarMaxx system does not require appreciable extra labor, other than a few seconds to check in bottles with a hand-held barcode reader. In fact, according to the company, labor is saved by reducing the time necessary for regular liquor inventory. The system is scalable to your operations, and the return on investment is touted as four to eight months. For more information, visit http://mybarmaxx.com.

Use the NRA USAR to Categorize Your Beverage Sales Properly

The most important element in controlling beverage cost is to categorize beverage sales and cost according to the Uniform System of Accounts for Restaurants (USAR) as published by the National Restaurant Association (NRA). According to the USAR, beverage sales pertain only to alcoholic beverages. Soft beverages are considered a subcategory of food. Within the beverage group are categories for liquor, wine, draft beer, bottle or canned beer and brewery-produced beer. The systems and controls needed to control each of these categories are sometimes applicable to all and other times are specific to a particular category.

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