RUNNING A MORE PROFITABLE BAR

3 Actionable Steps to Boost Your Beverage Program

TOOLBOOKS No. 2 RUNNING A MORE PROFITABLE BAR

3 Actionable Steps to Boost Your Beverage Program

TOOLBOOKS CONTENTS

Intro 4

1. Building an Optimal Product Portfolio 6

2. Ordering to Reduce Sitting Inventory 12

3. Calculating and Interpreting Pour Costs 16

Wrap Up 20 ABOUT BEVSPOT

BevSpot is a passionate tech startup obsessed with helping the beverage industry. Working alongside the best bar managers, beverage directors and sommeliers, we’ve built an online platform that bridges disparate bar systems and allows our users to get back to doing what they love.

We know that technology can save you time and increase your revenue. But, software can only go so far. That’s why we strive to provide you with the right tools and team you need to implement a system that works for your bar. INTRO

Oh to be in the wonderful restaurant industry: so important to so many people—an industry that truly never dies. A place that provides food, drinks, and an overall foundation in the world of hospitality. It represents blood, sweat, and tears—a great deal of work with the hope of an even greater reward.

On the other hand, hard work doesn’t always pay of, and the restaurant industry is an extremely risky place to be considering that 60% of restaurants go under in their first year, and 80% fail by the fifth year.1 Sometimes these failures fall on bad luck, hard times, and poor decisions. Sometimes they seem inexplicable.

But even if we try to place blame on extenuating circumstances beyond our control, the facts don’t lie—any failed business comes right down to the numbers. We also know firsthand that the right knowledge and tools can steer those numbers straight toward your goals.

So you’ve decided to open a restaurant or bar, or perhaps this isn’t your first rodeo and you’ve been in the business for quite some time. Either way, you’ve come to the right place to learn the key metrics in running a better business behind your bar.

1 http://www.businessinsider.com/why-restaurants-fail-so-often-2014-2

1.

BUILDING AN OPTIMAL PRODUCT PORTFOLIO

Let’s start with a quick recap. In our first eBook, Tips and Tricks for Managing an Efcient Bar, we discussed usage calculations that help to better understand your most popular, and least popular products, and we learned how to use that information towards setting accurate stocking goals, or pars. We also touched on why too much sitting inventory can have a negative impact on overall performance.

Now that we have a better understanding of these key concepts, let’s dig even deeper and discuss how we can apply them to build a better business behind the bar.

Think about all the details in your bar that directly relate to customer preferences: music, food, overall appearance, service, comfort. Really, there are an infinite number of factors to consider if you want your bar to be a real crowd-pleaser. We can’t help you with all of these details (we’re not chefs or interior decorators) but what we can do is help with an extremely important aspect—your beverage program. And what drives your beverage program? The products and drinks that you ofer. Since we believe that the right drink can cure almost anything, what you carry behind the bar is pretty important! So how can you come up with an optimal product ofering in the first place? We know firsthand that our own catalog has over 100,000 spirits, wines and beers. So where do you begin? Factor in the sheer number of diferent cocktails you’re likely ofering, and ever-changing consumer preferences, and you’ve got a pretty challenging task on your hands.

Luckily, the tips and tricks we’ve already reviewed can help you decide what product to ofer by allowing you to delve into what your customers really want, using usage calculations.

Step 1: Calculating Usage at the Product-Type Level

To figure out which products are most successful for your bar, you’ll need to calculate usage at a product-type level. We like our whiskey at BevSpot, so we’ll start with our own whiskey selection and calculate usage for a 7-day period. We’ll then compare that to our vodka selection, which is clearly the less popular choice for our patrons (ahem, employees).

BEVSPOT BAR

4 x + 3 x + 3 x = $270

Whiskey:

Starting Inventory - Monday: 4 bottles of Jack Daniel’s ($30 each = $120), 3 bottles of Jim Beam ($20 each = $60), and 3 bottles of Jameson ($30 each = $90)

= 10 bottles of whiskey total, equal to $270

Received Inventory - Tuesday: 1 bottle of Jameson ($30)

7 BUILDING AN OPTIMAL PRODUCT PORTFOLIO Ending Inventory - Sunday: 2 bottles of Jack Daniel’s ($60), 2 bottles of Jim Beam ($40), and 1 bottle of Jameson ($30).

= 5 bottles of whiskey, equal to $130

Whiskey Usage: 10 + 1 - 5 = 6 bottles or $270 + $30 - $130 = $170

2 x + 2 x = $120

Vodka:

Starting Inventory - Monday: 2 bottles of Absolut ($25 each = $50) and 2 bottles of Grey Goose ($35 each = $70)

= 4 bottles of vodka, equal to $120

Received Inventory - Tuesday: 3 bottles of Smirnof ($15 each = $45)

Ending Inventory - Sunday: 1 bottle of Absolut ($25), 1 bottle of Grey Goose ($35), and 2 bottles of Smirnof ($30)

= 4 bottles of vodka, equal to $120

Vodka Usage: 4 + 3 - 4 = 3 bottles or $120 + $45 - $120 = $45

8 BUILDING AN OPTIMAL PRODUCT PORTFOLIO These numbers provide direct data on preferences at The BevSpot Bar, and since it’s clear that there’s about twice as much consump- tion of whiskey as vodka, it may make sense that the bar stocks about two times as much whiskey as vodka, and ofers a wider brand selection as well.

The BevSpot Bar is likely on a much smaller scale than your business, being that it’s housed in our ofce. Still, calculating usage for all of your spirits and comparing the total usage for each product type follows the same concept. This calculation will show you exactly how much vodka, whiskey, rum, and other spirits your bar is selling at any given period of time (weekly, monthly or otherwise).

Step 2: Decide How Much of Each Product To Carry Based on Relative Usage

Knowing how much of each type of product you’re selling, you can now divide these usage numbers by the total usage for your bar. This will give you the percentages of product you should consider allocating to each specific product type.

Let’s say your bar sells $20,000 in spirits each week, and $5,000 of that is in whiskey. Based on these numbers, it makes sense that you’d allot roughly 25% of your spirit product ofering to whiskey.

So if your goal is to stock 100 diferent spirit products, this data suggests that 25 of those products should be whiskey.

Apply this same process to all of your product types to see how much of each you should be stocking. Of course some personal judgment is involved, but nothing provides a better view of your bar than lever- aging customer data to directly cater to your customers’ preferences.

9 BUILDING AN OPTIMAL PRODUCT PORTFOLIO Added bonus: You’ll also reduce your sitting inventory by not carrying an abundance of products that your customers aren’t even drinking. Win-win!

Step 3: Use Specific Product Infor mation to Add or Remove Products

Now that you’ve decided how much of each product type to carry, you can drill that data down even further and look at specific bottles and brands to gain a better under standing of which to keep and which to move of the menu. The easiest way to do this is to simply sort by usage and remove the slowest moving products.

For instance, if you decide that you should be carrying 10 diferent rums and you currently ofer 13, remove the three bottles with the lowest usage. This will increase the efciency of your rum portfolio and bar overall. Assuming you are pricing all of these products efectively (stay tuned for our next eBook to help with this!), these usage metrics provide great insight into your customers’ preferences.

Take it one step further and ensure that you’re catering to diferent types of customers by ofering brands at various price points. Use the cost per ounce (bottle price / ounces in the bottle) for your products in each group to ensure that you have low, medium and high price point options in your portfolio. This way, every customer with a preference for a certain type of product has the perfect option!

Creating an optimal product portfolio for a bar takes a great deal of personal judgment and a deep under standing of your customers. Try taking some of the trial and error out of the process by applying hard customer data that enables you to make better decisions, cater directly to your customers, improve sales at your bar, and save you on upfront costs.

10 BUILDING AN OPTIMAL PRODUCT PORTFOLIO

2.

ORDERING TO REDUCE SITTING INVENTORY

Knowing what products your bar should be carrying is step one. Now you have to actually order those products, and efcient ordering processes can be quite tricky.

Hopefully you remember just how bad sitting inventory can be for business. In our first eBook, Tips and Tricks for Managing an Efcient Bar, we discussed how sitting inventory actually represents dollars that you could put directly back into other aspects of your business.

One of the biggest reasons that sitting inventory can kill your profits is shrinkage or lost product. According to beverage auditing companies Beverage Metrics2 and Stock-Taker,3 industry average shrinkage rates are 25%, and the National Restaurant Association reports that 75% of that is due to theft.4

While many restaurants and bars focus on inventory control systems to reduce shrinkage, revamping your ordering process can also be impactful to reduce loss. These simple tips will help you make smarter purchases that reduce shrinkage, and ultimately generate greater profits for your establishment.

2 http://www.beveragemetrics.com 3 http://alcoholcontrols.com/areyocopetoh.html#.VmmwWOMrKRu 4 http://www.restaurantowner.com/public/Profit-Tip-75-Percent-of-All-Invento- ry-Shrinkage-Happens-as-a-Result-of-Theft.cfm Tip 1: Be Careful of Unnecessary Purchases Based on Quantity Discounts

We know it can be difcult to resist a good deal. And while it might seem like quantity discounts increase overall profitability due to the potential of reducing your cost per ounce (less money for more product has to save money, right?). Not so fast.

Factoring estimated shrinkage into the equation will directly counteract these cost reductions.

Let’s assume a regularly priced case of vodka costs $200 and your distributor is running a quantity discount that grants you 10% of each case if you purchase two or more.

Despite only needing one case, that 10% discount is too tempting, so you buy two cases for $360 (2 x $200 per case – 2 x $20 discount per case). Instead of spending $200, you end up spending an additional $160 and getting twice as much product. Your logic: saving $40.

Now let’s take a deeper look at that $40 “savings.”

In order to save money, you actually had to spend $160 more than you originally intended. Based on the aforementioned statistics, if we assume 25% shrinkage on that extra $160 of inventory you’ll have on hand: 25% x $160 = $40.

13 ORDERING TO REDUCE SITTING INVENTORY Based on the industry shrinkage statistics, $40 worth of this addi- tional product will end up lost. Instead of saving $40, shrinkage ends up wiping out any appealing cost benefits of the order. Now factor in the extra space and time needed to count the additional product (that you didn’t really need in the first place), plus the additional cash flow impact on your business, and suddenly that good deal might not have been the best decision for your bar.

Tip 2: Purchase to Reduce Sitting Inventory

Since shrinkage can take the discount out of Quantity Discounts, how can you increase profitability with smarter ordering? Focus on reducing sitting inventory as often as possible, and only take advantage of quantity discounts when it truly makes sense after factoring in shrinkage.

If you have $40,000 in inventory and sell $10,000 of product each week, you have four weeks worth of sitting inventory on hand. By reducing your sitting inventory to $30,000, you will not only gain $10,000 back in your pocket, but you will also reduce your shrinkage by $2,500 every week (25% x $10,000). Remember that if 25% of any product you purchase will be lost to shrinkage, the less product you have on hand the less you lose, and therefore the greater your profits.

By only ordering product that you absolutely need—based on usage calculations—you will quickly reduce your sitting inventory levels, increase your bar’s efciency, reduce shrinkage losses, and increase your bar’s overall profitability.

14 ORDERING TO REDUCE SITTING INVENTORY

3.

CALCULATING AND INTERPRETING POUR COSTS

If we haven’t already proven just how important inventory usage calculations are, now we arrive to an extremely common and critical calculation: your bar’s pour costs.

Pour costs represent the comparison of your cost of goods to your product sales, expressed as a percentage:

Pour Costs = Inventory Usage/Sales

The Impact of Pour Costs

Pour costs are an essential barometer for bar profitability, and since running a bar can be costly, controlling pour costs (meaning keeping them as low as possible) can account for the diference between a wildly successful bar and a failing one.

Consider the following scenario: Bar A and Bar B are located next door to one another. Both sell around $1M at the bar each year, but Bar A runs a 20% pour cost and Bar B runs a 30% pour cost. Bar A, on the exact same sales with roughly the same client base, will make $100,000 more in profits each year! This may seem like an extreme example, but we regularly interact with bars on both ends of this spectrum.

So what’s the deal here?

Inter preting Pour Costs

Why is Bar A making so much more money per year with the same products, location, and client base?

To figure this out, we not only need to be able to calculate pour costs, we need to interpret that calcu lation. Inter preting pour costs is one of the most misun derstood aspects in managing a bar—it seems difcult, confusing, and time consuming. But it doesn’t have to be when equipped with the proper tools.

A simplified breakdown can help in understanding the efects of pour costs, which are really only influenced by three factors: 1) drink costs 2) drink prices and 3) product loss.

1) Drink Costs: The amount you pay for your product directly influences your pour costs. When product costs increase, the prices you charge should increase as well, otherwise you’ll see your pour costs go up and your profit levels go down.

In the Bar A vs. Bar B scenario, it could be possible that both bars are selling drinks at the exact same prices, but that Bar B does not utilize good relationships with its distributors, and may be paying more for product.

2) Drink Prices: The price you charge for a drink is decided by a few diferent factors. Location, client base and client preferences between beer, spirits, and wine will all ultimately influence the amount that you charge for a drink.

Another possible issue between these neighboring bars could be

17 CALCULATING AND INTERPRETING POUR COSTS that Bar B is not pricing its drinks as high as Bar A. If Bar A is able to achieve a loyal clientele with higher priced drinks, Bar B should likely be pricing its menu at a comparable level.

We’ll dig into pricing drinks in more depth in our next eBook (coming soon!), but it’s important to know that being very thoughtful about efectively pricing your drinks will help maximize your potential profit, and therefore minimize your pour costs.

3) Product Loss: The final factor that can influence pour costs is your inventory variance, or what you actually sold versus what you should have sold based on the amount of inventory used. In a perfect world, these numbers would line up exactly. But as we discussed in chapter two, shrinkage is an unavoidable obstacle that you need to account for. Over-pouring, broken bottles, spoiled product (for wines poured by the glass), complimentary drinks to regulars/friends/staf, and theft are all common reasons that your sales don’t match up perfectly with your inventory.

Problems at Bar B could come down to its employees giving away free drinks too often, or clumsily making drinks and spilling product or even breaking bottles. There could even be an employee theft problem at this bar.

Most likely, Bar B is sufering from a combination of all three factors and is overall running less efciently than Bar A. Bar B’s next steps should be to dig deeper into its ordering processes, menu prices, and employee training. By keeping on top of this data regularly through proper record keeping and analytics tools, Bar B could be more profitable in no time!

Can you relate to Bar B? BevSpot helps bars deal with these exact issues by providing tools that enable more efcient inventory and ordering processes and automated access to these and other critical metrics. By exploring your data in BevSpot’s platform, you can see exactly what’s hurting your bar’s profits, and easily see how to fix these issues. Learn more.

18 CALCULATING AND INTERPRETING POUR COSTS

WRAP-UP

Opening a bar or restaurant takes a great deal of work and dedication. It’s a huge risk, but as the saying goes: the greater the risk, the greater the reward. Focus on strategically operating an efcient business by using the right numbers and data to run your bar operations. Remember:

• Build a product portfolio that caters directly to your customers’ preferences • Avoid a surplus of product by ordering efciently • Understand the importance of pour costs and set a realistic goal for your bar

Interested in learning more?

These tips and tricks can be extremely helpful to understanding the operations side of your bar. But if you really want to unlock the data and insights behind it, we’re confident that our bar management software can help. Want to learn how? Check out our interwebs or just give us a buzz at 617-658-3123, we promise we’ll answer!