Pour Cost as a Measure of Shrinkage

You hear it a lot – “pour cost” – when you talk to bar owners about how their bar is performing from an inventory management – a “shrinkage” – perspective.

Running a bar where there is no shrinkage involves your bartenders pouring exactly what they’re supposed to be pouring into every drink they make. There are no giveaways and no theft. Without a doubt, it’s the ideal situation to which every bar should strive (provided that everyone involved knows that the “ideal” is virtually unattainable).

Bar owners measure their shrinkage in terms of “pour cost”. And when you dig a little deeper about how they calculate their pour cost, it’s apparent that there’s a huge disconnect in people’s minds about what they think their pour cost number represents and what their pour cost number actually reflects.  The traditional calculation of pour cost looks sound, but is actually an inefficient, inaccurate means it is to measure a bar’s performance.  The usual pour cost number is calculated using the traditional formula:

Pour Cost = Cost of ALL Goods Sold / Revenue Generated by ALL Goods

But actually, a lot of factors go into calculating the pour cost:

  • The brand of liquors served at your bar
  • The cost of each type of liquor
  • The serving size of liquor in your bar
  • The price charged for every drink, cocktail and shot made with each product

So, unless your shot size is exactly the same as the bars that you’re comparing your pour cost to – and you stock the exact same lineup of products, and your liquor/beer/wine vendor(s) charge you exactly the same for those products, then your pour costs are going to be different – maybe dramatically so. Which is to say that even if your bartenders are pouring with absolute, 100% accuracy, your pour cost across all of your products is going to vary – radically – from the pour cost of the bar next door or across the street.

Your expensive liquors generate a great deal of profit, but also raise the overall pour cost for your bar. Your well liquors are cheap cheap cheap, and while they don’t generate as much profit, they lower the overall pour cost. Ask any bar owner and he’ll tell you that it’s the profit that keeps his bar in business – not achieving some mysteriously-fluctuating “lowest possible pour cost”. To aspire to the lowest possible pour cost may in fact be aspiring to the lowest possible profit for your bar.

So what is needed is for bars to employ an improved variation of the pour cost formula to determine their operating efficiency in terms of inventory shrinkage. That variation determines the pour cost on a product-by-product basis, and then compares the “realized” pour cost for each product with each item’s “optimal” pour cost.

The “realized” pour cost is calculated as usual but for each individual product. The “optimal” pour cost is calculated according to what the pour cost would have been had the bartender served every drink and shot with the product with absolute accuracy. Only by comparing these two values – on a product-by-product basis – can a bar’s owner determine how their bartender’s accuracy impacted their bar’s performance.

Yes, determining “realized” and “optimal” pour cost for each of the products behind your bar is a huge pain the butt to calculate, but it’s the only way to arrive at a pour cost number that’s even remotely relevant for your bar’s shrinkage.

Unless you’re using TavernTrak in your bar, because with TavernTrak, the calculation is automatic.

For every stock take you perform at your bar’s stations – TavernTrak automatically calculates – in addition to the color-coded Usage vs. Sales Report – the “realized” and “optimal” pour cost and provides it to you on a product-by-product basis (click here to view a sample TavernTrak “Pour Cost” report) so you can see not just how accurately your bartenders are pouring behind the bar, but how that accuracy impacts your bar’s real pour cost.

And as a side-benefit, TavernTrak also “watches” your product list, the vendor’s pricing of those products, as well as the items on your POS system – and when it determines that the Gross Margin (directly related to – it’s the inverse of – Pour Cost) of a given product or drink falls below your configured target value, it will automatically notify you, giving you the opportunity to adjust your prices for the item(s) to maintain your desired Gross Margin.

So, instead of fretting about a meaningless, almost arbitrary number, what you really should be comparing is the variance between your optimal Pour Cost and your realized Pour Cost, because the difference between those two numbers is the only number that really matters.

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