Understanding & Calculating Beverage Cost

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While reviewing P&L accounts, we often use the term F&B COS (Food and Beverage Cost of Sales) as it represents the total running cost of a whole department, venue or section. To be able to understand and effectively manage the cost, we need to separate Food and Beverage and treated individually.


I have reviewed Food Cost and 10 principles of Food Cost in my last article. We will look into Beverage cost in this article.


Alcohol sales (beverage sales) are an easy way to increase profitability because the costs are lower and the gross margin is far greater for beverage than for food.


UNDERSTANDING BEVERAGE COST PERCENTAGES

In Food and Beverage industry, operators typically evaluate their success based on their "cost of goods" percentage which commonly referred to as either “Beverage COS” or “pour cost.” This basically calculated by simply adding up the cost of the product used and dividing it by the cost of the product sold.


The main problem with pour cost is deciding what to compare it against. How do you know if your percentages are in line? Most operators simply look at the average pour costs in the industry or at their previous annual cost percentages.


On that basis, most operators use following guidelines as combined costs of below items create Beverage Cost;

Liquor : 15% – 17%

Bottled Beer : 23% – 25%

Draft Beer : 21% – 22%

Wine : 30% - 40%

Soft Drinks : 6% – 8%


Please note that alcoholic beverages are included in beverage cost calculations. Soft drinks, juices, coffees, and other non-alcoholic beverage sales are included in food cost calculations.


When all combined, based upon different sales mixes, prices and costs, a typical (combined) beverage cost is 21 percent. Ideally, when your beverage cost goes above 21 percent of your beverage sales, indicates that something is wrong.


So, what should your beverage cost percentage be? Successful restaurants generate beverage costs in the mid 20% range. However, different types of operations typically run higher or lower percentages - fine dining may run up to 35% (sales of bottles of wine are usually less profitable other alcoholic beverages) whereas brewpub restaurants may run about 15%. Comparing your cost percentage to restaurants with similar menus and service levels provides a more accurate perspective.


Still, if you want to improve further and use the full potential of your venue then you should compare your “Actual” cost percentages to your “Potential or Optimal” cost percentages. Optimal cost percentages are determined by taking into account an operation's selling prices, purchasing costs, and sales mix.


  • When calculating a potential liquor cost percentage, the desired liquor shot size needs to be considered.

  • When determining potential draft beer cost percentages, the sales mix of each draft beer container used (mugs, glasses, pitchers) has to be figured into the calculation.

  • Determining an operation's potential bottled beer cost percentage is just a matter of dividing a bottle's cost by its selling price.

  • Actual cost percentages are the actual costs incurred (taken from distributor’s invoices) divided by the actual sales generated (taken from the Point-of-Sale registers.)

I have attached Excel spreadsheet which could help you to calculate your optimal beverage cost percentages by different categories as well as identifying potential COS. Please visit https://hospitalitycode.com/resource-hub check and compare your potential cost percentages to your actual cost percentages to help evaluate your establishment’s lost profits by revenue category.


CALCULATING BEVERAGE COST

Please remember that soft drinks, juices, coffee, and other non-alcoholic beverage sales are included in food cost calculations, not beverage cost calculations.


Beverage Cost = Cost of Beverage Sales / Total Beverage Revenues

Key factors to consider when calculating Beverage Cost;

Time Frame:

Establish a specific time period for analysis. The beverage sales and costs should be generated during a set accounting time period of at least two weeks or more typically, every 28 days, or monthly. It is critical that the elements of the beverage cost calculation (sales, inventories and purchases) are representative of this time period.


Accurate Recording of Beverage Sales:

This is, in theory, a straightforward process, collecting revenue generation reports from the Point-Of-Sale system for a required period. Make sure these reports only include sales generated from beverage sources (exclude "food" and "other income" revenues)


Establishing Cost of Beverage Sales:

The costs associated with beverage sales are comprised of purchases and inventory level adjustments. Purchases should include delivery charges if applicable to be able to present true cost to us.

Some operators only looking purchases and ignoring inventory level adjustment and therefore, they could see fluctuations in their costs month by month. You need to include Inventory Adjustments when determining beverage cost. Depending on the day purchases are made and what the cut-off date is for including sales in the beverage cost calculation, your beverage cost could appear higher or lower than it actually is. Additionally, this discrepancy makes it difficult to compare and track beverage costs.

Your purchases should sync with delivery and sales figures should offset these purchases accurately.


Determining Inventory Adjustments:

To properly determine beverage cost, a physical inventory of the main bar, service bar and storeroom areas must be conducted at the end of each period. Once you have your ending period inventory level, look at the change from your beginning (start of the time period) inventories (bars and storerooms). The key to accurate cost determination is understanding the role inventory levels play.

Cost of Beverage Sales =Purchases +/- Inventory Adjustment

Note: Add if Beginning Inventory higher than Ending Inventory or Subtract; if Beginning Inventory lower than Ending Inventory

Calculating Beverage Cost %:

Once we set time frame and establish accurate sales and cost figures then we can confidently calculate the Beverage COS %.


Beverage Cost = Cost of Beverage Sales / Total Beverage Sales
Beverage COS % = (Total Beverage Cost Price / (Total Beverage Revenues – VAT)) x 100

I regularly upload easy to use spreadsheets for guidance and free to use basis. Please visit hospitalitycode.com/resource-hub to download.


Please follow me on www.hospitalitycode.com for my articles on various areas of Hospitality business, trends and interpretation methods.

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