Beverage Cost Control: Managing for Profit ❖ 259

Chapter Beverage Cost Control: Managing 19 for Profit After reading this chapter, you will be able to: ❒ Compute the cost of beverages sold. ❒ Determine prices using product cost percentage and contribution margin methods. ❒ Understand the variables that influence beverage menu pricing and their effects on profits. ❒ Understand beverage pricing methods for banquets and other catered events. ❒ Understand the importance of standardized recipes and how they influence profits. ❒ Understand the difference between keeping a physical and a perpetual inventory. ❒ Employ techniques to track and control beverage costs. Onion soup sustains. The process of making it is somewhat like the process of learning to love. It requires commitment, extraordinary ef- fort, time, and will make you cry. —Ronni Lundy in “The seasoned cook,” Esquire (March 1984) 257 ISBN: 0-536-08348-7 The Hospitality Manager's Guide to Wines, Beers, and Spirits, by Albert W. A. Schmid. Published by Prentice Hall. Copyright © 2004 by Pearson Education, Inc. 258 ❖ Chapter 19 Figure 19.1 A well-stocked bar. [Dorling Kindersley Images] Alcoholic beverages account for nearly 22 percent of restaurant sales. The major- ity of the money generated from these sales goes to profit because of the high markup on beverages. In fine restaurants, for example, a markup of 100 percent for a bottle of inexpensive wine is not unusual. Most drinks are easy to pour or mix, and the labor and beverage costs combined represent a small portion of the selling price. In the previous chapter, we discussed purchasing, receiving, storing, and issuing procedures for alcoholic beverages. While these procedures are similar to those used for food products, one should not necessarily assume that the process for controlling beverage costs will be the same as that for controlling food costs. In this chapter, we will focus on the procedures for tracking alcoholic beverage costs, determining prices, and controlling inventory. Calculating Beverage Cost As a Percent of Sales The percentage of cost spent on beverages is one of the primary benchmarks by which an operation gauges its overall performance. The formula for calculating beverage cost percentage is: ISBN: 0-536-08348-7 The Hospitality Manager's Guide to Wines, Beers, and Spirits, by Albert W. A. Schmid. Published by Prentice Hall. Copyright © 2004 by Pearson Education, Inc. Beverage Cost Control: Managing for Profit ❖ 259 Cost of Beverages Sold ÷ Beverage Sales = Beverage Cost Percentage The cost of beverages sold is calculated on the basis of the value of the entire beverage inventory: Beginning Inventory (last period’s ending inventory) $_____ Plus this period’s purchases + $_____ Equals goods available for sale = $_____ Less Ending Inventory (next period’s beginning inventory) Ϫ $_____ Equals Cost of Beverages Sold = $_____ Determine the cost of beverages sold for a given month, and divide this number into the beverage sales. The result will be the beverage cost percentage. When performing these calculations, it is important to note that if the bar transfers any beverage products to the kitchen for cooking purposes, those transfers need to be tracked and their value subtracted before totaling the cost of beverages sold. On the other hand, if the kitchen transfers product such as mixers and fruit to the bar, those transfers must be tracked and their value added before totaling the cost of beverages sold. Because of the relative ease with which a dishonest employee can manipu- late inventory records, and, therefore, beverage cost percentage, most experts rec- ommend that the duties of receiving, storing, issuing, and inventorying be separated. This is known as separation of duties. In other words, the individual who receives the product should not be the same individual who stores and is- sues the product. In addition, a different individual should be responsible for month-end inventories. While separating these duties is relatively easy for larger operations, it may be next to impossible for the smaller owner-operator who must rely on a limited staff. In cases such as these, it is wise to assign all of these duties to the owner or manager of the operation. Determining Prices to Ensure Profitability In the restaurant industry, cost of sales refers to the restaurant’s cost for products that are sold to its customers. Some operations may use the term cost of goods sold. Most foodservice operations break down food sales and beverage sales separately. Costs for each category also are shown separately on most operations’ profit and loss statements (P&Ls). Beverage costs include the purchase price of the alcoholic beverages and other ingredients, such as juices, carbonated mixers, and fruit used to make drinks. These (and all other) costs are customarily stated both in dollar amounts and as a percentage of sales. Determining what prices to charge for beverage products is related to cost control and to an operation’s overall profits. Charging too little for products can result in lowered profits; charging too much can result in lowered customer counts. Menu pricing for beverage sales is affected significantly by many factors, including local competition, customer ISBN: 0-536-08348-7 The Hospitality Manager's Guide to Wines, Beers, and Spirits, by Albert W. A. Schmid. Published by Prentice Hall. Copyright © 2004 by Pearson Education, Inc. 260 ❖ Chapter 19 demographics, product quality, and portion size. While a manager may not have an effect on all of these factors, he or she can exercise control in determining the amount to charge customers for drinks. In general, foodservice managers use one of the two following concepts to determine what price to charge: 1. Product cost percentage 2. Contribution margin The product cost percentage method of pricing is based on the idea that an item’s cost should be a predetermined percentage of its selling price. In other words, if a manager knows how much of a cost percent he or she wants to achieve on a drink, he or she can determine the price. Let’s say, for example, an operator wishes to achieve a 20 percent beverage cost on a Martini that costs $1.50 to produce. The Martini’s selling price can be determined by using the following formula: Product Cost ÷ Desired Product Profit = Selling Price $1.50 ÷ .20 = $7.50 If the Martini is sold at $7.50, a 20 percent beverage profit will be achieved. This across-the-board approach to pricing has its flaws. It often results in some items being priced too low and some items being priced too high. In general, pricing bottled wine only by the product cost percentage method is a strategy that may result in overall decreased bottled wine sales. It is important to price bottled wine so that the price spread—the range between the lowest- and highest-priced bottles—is not excessive. Reducing the price spread may as- sist the operator in not only selling more wine, but in selling more high-priced wine. One goal of establishing selling prices is to create a good price-value rela- tionship in the mind of the customer. If a customer does not believe he or she is receiving good value for the money spent, he or she will not make the purchase; therefore, beverage pricing usually is not based on a mathematical equation alone. Managers must keep the notion of perceived value in mind when creating prices. Another method of product pricing is to focus not on the item’s cost percentage but rather on its contribution margin—the difference between the item’s product cost and its selling price, expressed as follows: Selling price − Product cost = Contribution margin Contribution margin is defined as the profit or the amount that remains after product cost is subtracted from an item’s selling price. When using this pricing approach, operators often establish different contribution margins for various beverage items or groups of items. For example, draft beer may be priced with a contribution margin of $2.00 each, cocktails with a contribution margin of $3.00, ISBN: 0-536-08348-7 The Hospitality Manager's Guide to Wines, Beers, and Spirits, by Albert W. A. Schmid. Published by Prentice Hall. Copyright © 2004 by Pearson Education, Inc. Beverage Cost Control: Managing for Profit ❖ 261 Figure 19.2 Bottles of wine marked with bin numbers. [Pearson Education/Prentice Hall] and bottled wines with various other contribution margins. Therefore, in this case, if draft beer costs $1.75 per serving, its selling price would be $3: Cost + contribution margin = selling price $1.75 + $2.00 = $3.75 Pricing and Inventory Control for Parties and Receptions Beverage pricing for parties and receptions can seem daunting, but it need not be. Clients often have the choice of arranging for a cash bar or a host bar. When a cash bar is requested, guests attending the function are expected to pay for their alcoholic beverages as they are consumed. For a host bar, the host is charged at the end of the function. Cash Bar Procedures Standard pricing procedures will suffice for a cash bar. It is important, however, to institute strict control procedures in order to prevent bartender theft. Many operations now use a ticket system rather than having cash exchange hands be- ISBN: 0-536-08348-7 The Hospitality Manager's Guide to Wines, Beers, and Spirits, by Albert W. A. Schmid. Published by Prentice Hall. Copyright © 2004 by Pearson Education, Inc. 262 ❖ Chapter 19 tween bartenders and the customers attending the event. This method requires that guests purchase drink tickets that can be exchanged at any of the satellite bars set up for the function. Some operations color code tickets. For example, they may use blue for beer, pink for wine, and green for mixed drinks.

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