The American Mixologist Online® Newsletter Vol. 16, No. 3 All Rights Reserved
Management

Keeping a finger on your bar’s financial pulse is accomplished, to a degree, through analyzing your cost percentages, or what in jargon is referred to as pour cost. It accurately reflects the relationship between cost and gross sales. Perhaps the single constant in this business is that every beverage operator would like to see his or her pour cost lower.

"If management doesn’t seriously scrutinize their bar costs, then the bar staff is free to do virtually anything they want to at the point of sale," states Mark Pollman, Hall of Fame bartender and fixture at the Fox and Hounds Pub in St. Louis. "Bartenders can alter portioning, give drinks away, pocket cash proceeds and any number of other equally insidious practices. Without analyzing pour costs, the odds of catching them is remote. What a waste of potential profit."

Pour cost is derived by dividing the cost of depleted inventory by the gross sales generated over a given period of time. A liquor pour cost of 18.3%, for example, means that it cost a little more than 18 cents to generate a dollar of liquor sales. It also means that the gross profit margin is 81.7%, or just under 82 cents per dollar of sales. Every percentage point pour cost decreases, gross profit increases by the same amount.

Knowing your bar’s cost percentages, however, is only part of what you’ll need to know to make informed decisions. The direction pour cost is heading is as important as the actual percentage itself. For example, a pour cost of 18.3% could be cause for elation or alarm depending on its relationship to the bar’s previous performance.

"I’ve worked with several clients who thought that their pour costs of 18% or 19% were outstanding," comments Ian Foster, regional vice president of Bevinco Liquor Control. "But we found substantial hidden losses from over-pouring, mistaken entries and bartender theft. After we helped the clients eliminate these problems, they were pleasantly surprised to learn that their actual pour costs should have been closer to 16%. The difference amounted to a considerable amount of lost profits."

Managing through the use pour cost alone has its downsides, however. "Operators intellectually understand that dollar profit is more important than pour cost, but they sometimes have difficulty putting that knowledge into practice," observes David Commer, consultant and former beverage guru for T.G.I.Friday’s. "It seems easier to understand on the food side of the equation, where selling a steak dinner at a $6 profit is more desirable than selling a burger at a profit of $4, despite it having a lower cost percentage. Like the adage goes, you bank dollars, not percentage points."

Ten Truths About Pour Cost
"Despite its shortcomings, pour cost is an essential financial gauge," contends Bevinco’s Foster. "Beverage operators need to know how much money they are making in their bars and pour cost does exactly that. When pour cost goes up, profit goes down. What it won’t do is pinpoint where the problems are. In fact, the reasons for a rising pour cost could be that your managers are doing their jobs well."
Commer explains that while employee-related issues like over-pouring and theft are often at the root of the problem, a rising pour cost may also mean that management is doing a better job of promoting higher profit premium spirits and drinks.

"Top-shelf spirits are steadily increasing in popularity, and rightly so," says Commer. "Because of their higher cost per ounce, they will have the effect of increasing a drink’s cost percentage and upping the bar’s cost percentage, but it contributes a higher dollar profit. Yet today managers are often measured and rewarded based on cost percentages, so it is not surprising that their primary focus is on pour cost."
For this reason, both Foster and Commer recommend not basing management bonuses on pour cost. "If it is, you are giving an unspoken message that your manager would be better off if he discouraged up-selling," suggests Foster.

What other truths surround this often used and frequently misunderstood profitability gauges. The experts have taken their combined experiences and rendered it down to the following ten truths about pour cost.

• To Catch a Thief — Pour cost is relatively ineffective at on catching employee theft, in fact, a bartender with only a limited understanding of how things really work behind the bar can rip you off all night long and actually make your pour cost drop. The best line of defense is to supplement your efforts with an analytical index hinged to gross sales, such as tracking bar productivity (see inset). The combination of the two are highly effective at detecting any scams, schemes and illicit practices.
  
  
• Maintaining Control — Although it may be tempting to ask for the assistance of your bartenders when taking a physical audit, don’t. It is strictly a management function. Better yet, the owner should conduct the audit and calculate the operation’s cost percentages. It’s even advantageous for the staff see you behind the bar taking audits of the inventory. Knowing that ownership/management is actively engaged in tracking costs is a deterrent in itself.
  
  
• Factor Out Variables — You need to take precautions to ensure that your pour cost calculations do not penalize the staff for normal occurrences. Complimentary drinks go with the territory, so track them and factor out their cost from the ending inventory. The same is true for drinks spilled, products wasted and inventory transferred from one outlet to another, such as to the kitchen for use in entrees or desserts. The result will be a more reality-based pour cost.
  
  
• A Call to Action — Large fluctuations in pour cost percentage signal trouble. A swing of one or two percent in either direction should trip an alarm. Costs typically shouldn’t deviate more than a point between inventory periods. When it does make a significant move either up or down, investigate why. While at times the reason may elude you, the effort will reinforce to the staff your commitment to controlling costs.
  
  
• Troubleshooting A Rising Pour Cost — Employee theft is but one of the factors that will cause your pour cost to rise. Increases in wholesale prices and lagging drink prices are notorious for shrinking margins and sending pour cost steadily skyward. If the demographic composition of your clientele shifts, your product mix will also likely change. Significant shifts in sales mix will affect pour cost. Also, don’t forget to factor in any drink promotions that you may have run and lastly, don’t discount the possibility of human error when conducting the audit.
  
  
• Pour Cost Intervals — The higher your sales volume, the more frequently you need to take physical audits behind the bar and calculate your ongoing costs. The more frequently you calculate your pour costs, the more insight you’ll gain into your business. If a problem does exist, the sooner it is uncovered, the sooner it can be dealt with. Some operators track their costs on a daily basis.
  
  
• Consistent Methodology — Regardless of whether you weigh your bottles or ascertain their contents visually, stay the course and keep doing what you’re doing. Consistency in methodology is almost as important as the accuracy of the audit.
  
  
• How Low is Low? — While it’s natural to want your pour cost to high profitability, there is a point where cost percentages can drop unreasonably low. In other words, a liquor pour cost in the low teens likely suggests that your drink prices are too high, serving portions inadequate, or both. In either case, there’s little value for the clientele.
  
  
• Comparing Apples to Apples — Because liquor, beer, wine and non-alcoholic beverages sell at different cost percentages, each category needs to be calculated separately for the entire process to have significance. You would also be well advised to calculate pour costs for your bottle and draft beers separately. The method of deriving pour cost percentage is the same for any of the categories.
  
  
• Take a Deep Breath — The consensus of our experts is that you need to exercise control when responding to an unpleasant set of pour cost figures. Eliminate all plausible variables and recheck your math. Many a great bartending staff has been broken up over cost percentages—hopefully for the right reasons.

Pour Cost: How's it Calculated?
Bars located in the same general vicinity with the same concept that appeal to the same clientele will often generate different pour costs. A partial list of reasons why include differences in portioning, drink prices, managerial proficiency and the quality and honesty of their respective bartending staffs.

What won’t vary is how pour cost is calculated. Here’s an illustration of how to derive liquor pour cost. — RP

Spotting the Fingerprints of Theft
"If you’re waiting for a rise in your pour cost to alert you to a potential theft problem, you may be out of luck," submits industry guru Jon Taffer, chairman of the consulting firm Taffer Dynamics and The Neighborhood Marketing Institute, a revenue growth program. "While measuring your cost percentages is a pivotal thing to do, it’s not enough. Regardless of the scam, or the subterfuge involved, the stolen proceeds wind up in the bartenders’ pockets. So to spot the first signs of theft, also look at sales."

The index expressly designed to do that is bar productivity, which tracks bartender sales per hour. It is computed by dividing the bartender’s gross sales by the number of hours he or she worked. Track productivity for each shift on an on-going basis. After several weeks patterns will emerge. It will soon become evident which bartenders are your sales leaders and who falls consistently short of the staff average.

If a bartender’s consistently generates low sales per hour, five things are possible. He may be moving too slowly to keep up with demand. He could be preparing inadequate drinks, so people don’t order another round. The person’s personality and attitude could be so off-putting that customers leave early. Four, his sales ability could be so unrefined that he consistently undersells.

How do you know which it is? Take some time and observe the person. If the first four explanations don’t fit, it’s quite possible that the person is stealing from you. Regardless of the scam, theft takes a toll on productivity.

Between tracking pour cost and bar productivity, there isn’t an employee scam or fraud that you can’t catch. — RPTechnology to the Rescue

It seems the age of technology has finally arrived behind the bar. One of those innovations is BEVINCO, an independent auditing service. Armed with a laptop computer, electronic scale and a database developed specifically to track brand-specific depletion, a Bevinco auditor can generate management reports that compare exact usage to sales. The reports calculate the cost percentage and profit margin for each product behind the bar, as well as comparing those results to their respective optimum figures. The system is so precise that it will catch any type of impropriety.

One of the prime advantages of Bevinco over the other systems on the market is the fact that it is conducted by an independent auditor, someone who has no vested interested in how the numbers come out.

Another technological advancement is ACCUBAR, which uses a Palm-type computer with a barcode scanner to read the UPC labels. A silhouette of the bottle appears on the screen of the handheld device and the user indicates on the image where the fluid level in the bottle is. The computer instantly computes the volume and extends it by the cost per ounce.

AccuBar greatly speeds up the inventory process and enable the user to implement a comprehensive system that tracks inventory from receiving to consumption. The system issues reports quickly such that existing problems can be dealt with in a timely manner. The AccuBar system runs between $3000-$5000.

The category veteran is ACCARDIS, which features a hand-held microprocessor with a built-in keypad, a four-line liquid character display and a laser scanner. The device reads UPC codes, interfaces with an electronic scale and downloads the audit data into your computer. The Accardis system even has an ancillary system capable of measuring the amount of beer left in kegs without moving or lifting them.

The Accardis can track up to 2000 products at up to 100 stations or outlets and has the ability to generate 12 different management reports. The system, including all of the devices and software, costs $4500.

One the opposite end of the spectrum is the SHOT GLANCE INVENTORY SYSTEM, a low-tech solution that utilizes a series of hard plastic gauges contoured to fit against the various shaped bottles. Each gauge is calibrated such that at a glance you can read how many ounces are in a bottle. The field-tested system is a viable alternative to the age-old technique of eyeballing. It costs between $55-$99. — RP