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Managing the cost of a beverage program

Managing the cost of a beverage program

David Flaherty has more than 20 years experience in the hospitality industry. He is a certified cicerone and a former operations manager and beer and spirits director for Hearth restaurant and the Terroir wine bars in New York City. He is currently marketing director for the Washington State Wine Commission and writes about wine, beer and spirits in his blog, Grapes and Grains.

Washington State Wine Commission marketing director David Flaherty

Whether you’re the proprietor of a decades-old neighborhood watering hole or oversee a number of multi-million dollar units for a restaurant group, margins are tight, and every nickel and dime counts.

With possibly hundreds of drinks poured each night by dozens of employees, each one will eventually wind its way back to your bottom line, and either enhance your profit or slowly bleed it away. From the foam that pours out of your draft system to the open bottles of wine slowly turning to vinegar in the back of your bar fridge, the potential dollars being lost can be shocking.

“A well thought out and properly executed beverage cost strategy, more times than not, can mean the difference between success and failure,” said Darren Povero, general manager and sommelier for Kent & Co. Wines, a wine bar in Fort Worth, Texas.

That’s why operators are looking to sommeliers and beverage directors to create dynamic beverage programs that challenge the status quo, stand out in an increasingly crowded field of exciting concepts, and push the limits of customer expectations, all while remaining profitable and intelligently managed.

By making smart purchases, creating a solid system of beverage costing and pricing, and keeping a keen eye on what’s selling and at what rate, a talented beverage director can single-handedly deliver value to both your customers and to your business.

For Katelyn Peil, beverage director for Heavy Restaurant Group in Seattle, finding the right amount of money to charge for a drink is a balancing act.

“A successful business is based off of return customers. You ultimately need to price beverages to keep yourself in business, but also to keep your guests coming back for more,” said Peil, who oversees two locations of the Purple Café and Wine Bar, as well as The Commons Kitchen and Bar. “Learning how to price alcoholic beverages for your establishment involves finding a calculated balance between profit and customer satisfaction. Ultimately, your pricing should be dependent upon the amount you pay for your products, your target market, and the profit you would like to achieve.”

To track your costs and profitability, the math is usually pretty simple. Dan Bronson, beer and beverage consultant at Crescent & Vine in New York City, breaks it down this way: “The most common method is to use a fixed percentage — traditionally 20 percent for beer sold in restaurants and skewing slightly higher for bars. This makes bookkeeping a breeze. If you spent $100 on beverage and bring in $500, you know your system is working.”

But since individual bottles of wine and beer are not widgets, and don’t all experience the same volume of sales, a beverage director must get smart with pricing based on what their guests are consuming. Sometimes a standard markup can mean either a shockingly high price on a menu, or a number so low that it defies common sense.

“Do you want to charge $2 at your table service restaurant for a beer which costs 40 cents, and which guests value at around $4 to $6? Of course not,” Bronson said. “Likewise, should a $10 bottle of an adventurous new beer be priced at $50 simply to keep your bookkeeping easy?”

That’s where the forces of sales volume, profit margin and customer satisfaction intersect, requiring an experienced approach. Each product on your list will move at a different rate, and therefore must be priced at a number that ensures your monthly costs are maintained.

What were once considered “standard markups” for the restaurant and bar industry are being challenged as more information becomes available to the public, with a smartphone in every pocket. With pricing information so widely available, some operators are rewriting the book on how they approach their pricing.

Povero of Kent & Co. Wines said the current pricing system is out of whack.

“Three to four times the cost of the bottle is what the guest will pay in most restaurants in the United States. This highway robbery is sadly accepted by the general public, who are under the impression that it has always been and will always be that way,” he said. “This standard markup, a polite form of extortion, has even affected the wineries as well, many of whom are now making a ‘lower tier’ or ‘entry level’ wine, just so they can be at a reasonable price point on a wine list.”

Pricing strategies

(Continued from page 1)

Povero has adopted a different formula to guide pricing.

“For bottles, we take the same percentages as most retail stores in our market and online. We came up with a simple guideline when costing our wine: Wine price times 1.4 equals bottle price. This markup is the same for almost all of our wines from the 1863 Taylor Fladgate Single Vintage Port to our cheap and cheerful prosecco.”

However, when it comes to higher-volume offerings, he takes a slightly different approach.

“We add a small premium to our formula for by-the-glass pours,” Povero said. “This premium is meant to subsidize some of our expenses for glassware, storage, cleaning and potential loss. By only adding a small amount to our already low markup, we have had amazing success in our by-the-glass program, which now boasts 256 selections — the largest in the United States.”

The areas in your program that experience the most volume are generally where the most attention should be placed, Peil said.

“Small pricing changes in your program, regardless of the direction, can have huge impacts on your margins,” she said. “This can definitely be the case with higher volume products. You see this often with happy hour and any other promotion of lower prices. It is imperative to be aware of your sales, current market trends in your area, price competition, and making adjustments on core products to maximize your profitability, while still offering value and upholding the quality and standard set forth by your establishment. High volume products should be priced appropriately to help balance out the rest of your program, but should not be used as a greedy tactic to increase areas where the bottom line is already highly profitable. It’s all about balance.”

Watching your sales should be a daily exercise. Ask any good beverage director what their top three biggest sellers in any category are, and they’ll have the answer. Knowing this information not only tells you what your clientele prefer, but also will guide you on pricing.

“As a good rule of thumb, any item that guests will order without looking at your menu should be the items with the most controlled mark-ups,” Bronson said. “If I know that, regardless of brand, my Pilsner and IPA styles of beer will sell two to one over any other beer, you better believe that those SKUs will have 20 percent or lower cost.”

Povero has shifted his emphases away from menu price and toward where numbers first come into play: purchasing. When training managers, he espouses the philosophy of “it’s not how you sell, it’s how you buy,” to affect profitability. After developing strong relationships with his salespeople, they’ve been more willing to share information on items that are limited or being offered on discount.

For instance, Povero’s team was shown a rosé wine from California that had just come on the market and hadn’t yet been introduced to his competitors.

“We tasted it, loved it, and upon finding out how many cases the distributor had in the state, purchased it all,” he said. “We then took our standard markup and started to sell it. Our guests loved it, too, and started asking other restaurants and stores if they carried it, which of course they did not. In one month we sold 16 cases, mostly by the glass.”

How do you control costs of your beverage program? Join the conversation in the comments below.

Peil said the most important aspect of a successful beverage program is retaining value for guests.

"I have found that they are more tolerant of paying higher prices for products when they feel value is associated with it,” Peil said. “If our guests are not valuing our products, nor our level of service and the experience they have when coming here, the result would be a loss of our customer base, and we would not be in business.”

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