Proper menu pricing to achieve desired beverage cost percentages

One of the challenges to ensuring that your food and beverage cost are met is to make sure that you are charging the correct amount for all of the items on the menu.  There is a balance that must be maintained so that the prices are fair to the customer as well as being fair to the restaurant.  The managers should be held responsible for maintaining the proper cost percentages set by the restaurant, but that becomes a very difficult task if the pricing does not allow that to happen.  A proper food percentage should be at around a 35% for a high end restaurant and 30% is a good percentage for mid level/fast, casual dining.  For the beverage cost, the blended cost (liquor, beer and wine combined) should be around a 25%.

For beverage cost, it is much easier to set the cost percentage desired and achieve those percentages as there are less variables to work with.  For example, if a case of beer costs the house $24.00 from the distributor, then each beer costs $1.00 to purchase.  To run a 25% bottled beer cost the price that would need to be charged per beer is $4.00.  This should be an easy process to follow as there is no spillage or waste when it applies to bottled beer.  There is the chance of breakage occurring, but that needs to be built in to the cost percentage ratio.

In working with liquor, pricing should be affixed to the cost of a bottle of product as well as the size of the pour that is being done.  For example, if a customer would like a single liquor drink, like a gin and tonic, the pricing needs to be centered around the cost of the bottle of gin.  Let’s say that the bottle of gin is a $20 bottle.  In making the drink, the amount of gin that is used is a 2 ounce pour.  Keeping in a consistent mix, at a 3 to 1 ratio of tonic to gin there should be about 6 ounces of tonic water used.  In a 750ml bottle of gin, you could get 12.5 two ounce pours in making drinks.  That would mean that the liquor used in that drink would cost the house $1.60.  If the house was working at a 20% liquor cost, then this drink should be priced at $8.00 at minimum to cover the cost of the liquor.  There are the other costs involved in this drink (the tonic water and the lime garnish), so a reasonable price would be $8.50.  This type of breakdown maintains for all liquor drinks as there is a recipe for all drinks and if everything is priced out to work with the established liquor cost percentage, the pricing of the drinks will adhere to the set beverage cost.

For wine costs, this works in the same manner as liquor, working on the platform that there are 6 glasses of wine per bottle.  The cost percentage that should be a target for wine is 30% or lower.  The main difference as it applies to wine sales is that the price of wine from the distributor will vary greatly based on type, availability, perceived value and transport expense, just to name a few factors.  So, if a bottle of wine were to cost the distributor $10 per bottle, that would be sold to a restaurant for around $20.  Keeping with the cost percentage that is desired, that bottle would be sold in the restaurant to the customer for around $60 - $65.

The final area of beverage expense is for draft beer.  This has the largest margin for variance of all of the beverage categories.  First off, a good percentage for draft beer cost should be around 22%.  Some of the factors that come in to play with draft beer, as opposed to the other beverage categories, are spillage, waste (foamy beer, wrong temperature, dirty draft lines), size of the beverage and import versus domestic.  A standard half barrel keg (15.5 gallon size) holds 1,984 ounces of beer.  From that, if the standard pour is a 12 ounces beer, the keg holds 165 beers;  if it is a 16 ounce pour, there are 124 beers per keg.  Working with the 12 ounce pour standard, if a keg cost $100, then each drat beer would cost the house about $.61.  The proper sales price for that beer should then be in the $2.75 to $3.00 range.

The issue that exists with draft beer cost versus the other beverage categories is the ability to monitor and count the product on hand and compare the inventory counts to the daily sales totals.  Since there should be a direct correlation between the starting count number of an item and the ending count, the difference should be the number sold, and that would be reflected on a daily sales report to show the number of an item that was sold.  For example, if you started a shift with 150 Bud Lights and end with 70, the end of day sales report should show 80 sold.  If the number is less than that, this would indicate that there was some of the Bud Lights given away without being rung in.  With keg beer, it is very difficult to know how many have been sold during a shift since there is not a specific count that can be done.  This allows for the house to give away draft beer easier than any other product without the house being able to ‘prove’ what was actually sold.

By following these basic elements for control of menu pricing, your restaurant should be able to work within your set beverage percentages and you should be able to arrive at a profitable venture.

The importance of inventory control as it relates to restaurant profitability

In order for a restaurant to be profitable, there needs to be a focus on both the revenues and the expenses to be able to achieve profitability.  The revenue side of the equation is rather easy to track as there is a direct correlation between the number of customers that come to your restaurant, what the average ticket size is and what the total revenue is.  When it comes to the expenses, there are many different areas that need to be monitored to ensure that there is a level of fiscal responsibility that is being adhered to. 

When breaking down expenses, there are two categories that items fall in to, controllable and uncontrollable expenses.  Whereas uncontrollable expenses are items that can not be influenced by the normal flow of business (e.g. property taxes, insurance, rent), controllable expenses are items that an operator has a direct influence over (e.g. payroll, cost of sales, materials).  Within the realm of the controllable expenses, there are three general areas that the majority of the expenses can be governed.  Those are making sure that a proper menu pricing structure is in place, making sure that the controllable expenses are in line with a solid working budget and that there are sound inventory practices in place.

The proper menu pricing will go a long way in making sure that the restaurant’s food and beverage cost are within the range that has been set by the restaurant.  For example, if you want to run a 30% food cost, an entrée item that costs the house $3.00 to make needs to be sold at $10.00 in order to maintain the proper food percentage cost.  There is a balancing act that needs to take place as if the entrée is priced too high, you will lose customers due to high prices.  If the pricing is too low, the house will lose money.  There is the exception of a ‘loss leader’ item on a menu, however.  This is a menu item that is designed to be sold at below the set cost price, but it serves the purpose to bring in customers to the restaurant, as revenue is ultimately generated by having customers (but that will be discussed in more detail later).

As the restaurant brings in revenue through the course of a period/month, there should be the corresponding invoices being entered as payables that will show the expenses for the same time period.  This will allow the operator to watch and see if the controllable expenses are keeping in line with the budget that has been created.  For example, if the budget for linen use for the period is 1%, and there is $100,000 in sales, then the proper expense for the period for linen would be $1,000.  If the total sales for the period is higher than the budget, then more money can be spent on the different expenses, and conversely if the sales are lower than budget, expenses need to be lowered as well.

While most controllable expenses are not inventoried, the restaurant’s food and beverage purchases are.  This is a critical piece of the process, because this will expose bad ordering habits, improper invoice pricing and waste/theft.  The basic principle of an inventory is that more product is purchased than what is used in a given period/month, and the product that sits on the shelves does not get counted as an expense for the period.  Just the opposite, it works as a credit against the expense.  What is the closing inventory counts for a period/month will then be the opening inventory for the following month.  When calculating a food or beverage cost percentage for a month, the formula is taking the opening inventory amount and subtracting the closing inventory amount and then adding all of the purchases for the period.  That total is divided by the sales for the same time period (OI – CI + purchases = x;  x/sales = period cost).  If proper inventory controls are not in place, you will be getting back inaccurate costing percentages and thus either over stating or understating your restaurant’s financial position.

The first step of doing an inventory is the manual count process.  This is done by physically going though and counting each product that is listed on a count sheet.  The count sheets should be a listing of every single item that can be received through the ordering process.  When doing an inventory, it should be done (if possible) by two people, one to count and another to write down the totals.  This also, in large part, eliminates the potential for any theft during the inventory process.  When writing down the counts, the writing needs to be as neat and clean as possible to eliminate any confusion of what the counts are.  If it is possible to use a tablet or iPad when doing counts, that is even better so that the numbers are clear when it is time to enter the total into the accounting system.  When entering the count totals into the system, it is also important to make sure that the data is going in as accurately as possible.  Mistakes will inevitably happen, but there are ways to flag those mistakes so that they are easily detected and fixed before an inventory is finalized and the costs are set based on faulty data.

After entering the inventory count data into the accounting system, there needs to be a check to make sure that the current data is in line with what the standard count totals are for each product.  This can be done by running a report that compares the prior period counts to the current period counts.  If there is a variance that exists that seems to be above a standard variance percentage, then it would be wise to make sure that the count that was entered was accurate.  This could be a matter of a count on the count sheet being incorrect or it could be that what was keyed in was done incorrectly.  For example, if there was supposed to be a 10.5 count of a product, and 105 was entered by mistake, your inventory, and hence your inventory value, will be misrepresented.  Once the counts have been verified for their accuracy, the next step would be to make sure that all of the values are correct.

In checking the values of each item, once again you are looking for a variance in a value from the prior period to the current period that seems to be outside of the normal variance.  If you find any items that this would apply to, there are only a couple of reasons as to why this could occur.  You have already checked to make sure that the counts that were entered were correct, so the only factors that could be driving a large change in an item’s value would either be that the pack size has changed, or the purchase price has changed.  Since most accounting systems work with the function that the last invoice that was entered in to the system dictates the price of that item for the period, if an item has the wrong price, it will skew that item’s value for the period and change the overall value of the inventory. 

In order to check the item pricing, again, a report needs to be run that will compare the price variance from the prior period to the current period.  If there is a variance that would exceed what is considered a normal variance, then there needs to be research in to the invoices for the period to see if there was a change in the pricing from the vendor, or if there was an error in entering the invoice data.  This could also be due to a change in pack sizing for products.  For example, if you order a 30-pound case of shredded cheese, and the pack size was three bags of ten pounds and the price was $30.00, your system might recognize that each pack was $10.00.  If the vendor then started carrying the same product but the pack size was six bags at five pound each, your system may still recognize that each bag was worth $10.00 and again skewing the overall value of the inventory.

By checking all of these functions of your inventory, you can be assured that you are accurately representing the proper value of your goods each period.