February 1, 2010
The purpose of controlling beverage cost is to increase your sales. I’ll explain.
First, let’s digress. You are an F&B Director, or perhaps Beverage Manager or Bar Manager. You work hard to keep your beverage costs in line. If your cost margin is over budget you are “challenged” by your boss. If the cost is better than budget you are praised in the short term (but sometimes “punished” by future budgets that will now set this lower number as the new expectation).
Here is the typical scenario:
But if the current economic environment teaches us anything it’s this: the model above isn’t sustainable. And here’s why – eventually the never-ending demand for lower cost will create pressure to raise prices, and this could threaten your business.
So, what should your bar cost be – what is a “good” bar cost? I’ve seen everything from 14% to 35%. BTW both numbers might be “good”, because a “good” cost is any cost within acceptable variance to the theoretical (or “potential”) cost. That’s right: 14% might be good, and 35% might be good.
Then what should your theoretical cost be? That’s a strategic decision, and the tactics that will fulfill your cost strategy begin with your target market and include pricing, purchasing, promoting, merchandising, inventory and accounting practices, recipes, menu engineering, equipment selection and more. Controlling costs is about meeting your cost strategy targets – 14%, or 35%, or somewhere in between – and is success measured by the variance between your theoretical and actual costs. Ideally your budget is based upon this “cost strategy”.
Your cost strategy should allow for “targeted pricing”, i.e. pricing (supported by promotions and merchandising) that will promote sales. I’m not saying lower prices across the board, rather consider the category of products favored by the primary customer target, and then find ways to add value to select offerings in that category. Incorporate this into your cost strategy, factor it into your theoretical cost analysis, support it with a special program or promotion with merchandising and marketing: and now you have a sustainable process. You are controlling your costs strategically so that you can increase sales.