Measured by taking physical liquor inventory, what is the average Liquor Cost for bars? In my role performing liquor inventory for bars and restaurants professionally, I am often asked this question. I’d like to do my best to answer the question and also suggest some other ideas that hopefully will move your thinking past doing liquor inventory and comparing to average and into making your liquor cost to what’s optimal for your business.
To provide some context, Bar-i has performed free Liquor Inventory audits for more than 50 bars and restaurants in Colorado. One element of this involves accurately measured each bar’s liquor cost. My thoughts on the subject of average liquor cost are therefore based on this real world data.
The difficultly in identifying an average is identifying what constitutes an average bar. The liquor cost bars achieve is largely dependent on the nature of their business. This means that higher end venues that attract top dollar for their product are able to run liquor costs far lower than the average. On the flip side, bars that operate in sectors of the market which are more price driven, tend to have higher liquor costs. I’d say for high end bars, and bars in premium locations, the average is around 20% with the typical range being 18-23%. In the middle are neighborhood bars etc. which tend to run liquor costs with an average of perhaps 23% and a typical range of 21-25%. More price competitive venues such as fast-casual concepts have Average Liquor Costs of perhaps 26% with the range being anywhere from 24-28%.
Rather than trying to determine the average for your particular business, I believe it’s more valuable to individually consider the factors that affect your liquor cost. When you address all the individual elements, your will understand the balance between volume and liquor cost and won’t fall into the common trap of aiming at an ‘industry standard’ or ‘average’. Many owners and managers think their ‘costs are in line’. What are they in line with? If you’re saying they’re in line with your expectations, your expectations are probably more of a limiting factor than the nature of your business! Controlling your liquor costs starts with understanding the unique factors in your bars that affect your liquor costs and profits.
• Price Point: What you charge for your product (higher prices equal lower Liquor Costs). Consider how you compare to other local bars. The more you are able to differentiate yourself rather than compete purely on price, the better. If your atmosphere is better, your drinks more delicious and your staff are more knowledgeable and friendly, you will be able to charge a higher price and run a lower liquor cost.
• Product Mix: The mix of product you sell. This sometimes works in favor of lower end places since they do a greater portion of their business in well products. If Goose martinis are popular at your bar, that will tend to increase your liquor cost. Equally, bars whose sales are weighted heavily towards wine, will run higher costs. Think about how you can entice customers to buy drinks that are more profitable: The sale of a $7 signature drink will generate more profit than $4 well drink. Hint: a carefully selected drink menu is key to this aim.
• Wholesale cost: What you buy product for. The more you are able to benefit from volume discounts, such as buying whole cases, the better. Reducing your selection a little will allow you negotiate better deals and free up storage space to buy popular products in cases. Also consider your line-up of taps and speak to your distributors about how you could reduce your barrel prices. Your aim is to make your distributors compete for your business.
• Promotions: Running specials, happy hours etc. will increase your liquor cost as it means you get less money for the same product. Of course it also should increase your sales so focusing purely on Liquor cost only tells half the story. Be careful to run specials that attract new customers rather than providing discounts for existing ones.
• Portioning: What size are your draft beers pours? Is your standard liquor measure 1.5 or 1.25 ounces? How many ounces do you put in your martinis? In general I believe the average customer notices pricing more than portioning so factor that into your decisions.
• Inventory shrinkage: Every bar experiences some level of inventory shrinkage. This is defined as when product is used but not sold. This includes spillage, overpouring of individual drinks, giving away whole drinks without comping them or outright theft. The fact that a majority of bars still rely on liquor cost as their primary performance measure makes it impossible for them to manage this issue effectively. Given the fact that 20% inventory shrinkage is typical in the bar business, there is a strong chance that improving your inventory controls will have a significant effect on your profits. The following article highlights the range of liquor inventory systems that are available to help you address this issue: Liquor Inventory Systems
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