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8 May 2018

Hospitality Financial Leadership - Beverage Cost or Contribution Margin?

By David Lund - The Hotel Financial Coach
  • Hospitality Financial Leadership - Beverage Cost or Contribution Margin? | By David LundHospitality Financial Leadership - Beverage Cost or Contribution Margin? | By David Lund

We all heard about it every month. The beverage cost! And it usually was not very pretty. Seemingly always too high, and it typically created lots of finger pointing and much pontificating. Beverage cost was always a slightly complex beast and often misunderstood. That was largely because this poor cousin to food cost was shrouded in a bit of mystery and mystique, like a secret lost cocktail recipe.

Let's have a closer look at the black sheep of the family.

Many people are simply confused by beverage cost and, while it is an important standard to maintain, the real game to understand is contribution margin. What makes the biggest dollar profit is what is truly important to understand and focus on.

In hospitality there is a business version of schizophrenia. It is a different way of managing, measuring and reporting everything. Just when you think you have one area of the business figured out, you quickly and silently switch gears and, Voila! You have a more complex version of what you just thought you wrapped your head around. Rooms, food operations, spa, golf, retail, communication, banquets, mini bars and, alas, beverage sales. They all are seemingly the same but under the hood they act and produce very differently.

The black sheep of the family is the booze and it has four middle names:

  1. Liquor
  2. Beer
  3. Wine
  4. Minerals

Like most people's children, they all look and behave very differently. When it comes to their cost you are well advised to look in the two-way mirror and see their contribution as the bigger part of their story and not their cost.

Let's look at the first three

Contribution is measured two ways. The first is the inverse of the cost divided by the selling price minus one.

In the first example I am going to use a vodka tonic—it is in the liquor family.

We pour 1.5-ounce drinks in my establishment. A 26-ounce bottle of Smirnoff costs our hotel $8. We get 17.3 pours out of one bottle when we sell highballs (26 / 1.5 = 17.3).

We sell each highball for $8. My portion cost is $8 divided by the 17.3 number of pours = ($8 / 17.3 = 46.2 cents). My contribution margin on this example is 94.2%.

Another way to establish the contribution markup is to express this as ($8.00 - .462 = $7.53). In my liquor highball example, we produce a gross contribution of $7.53 and a gross contribution margin of 94.2%, or, inversely, a cost of 5.8%.

I need to also add my tonic cost. To control my portion, I always want to use a shot glass properly or— better still—an electronic portion device. (This is a key to success with No. 4— Minerals. Control your portions, control your profit.)

Now for the second example: contribution margin of beer.

If a bottle of beer costs me $2.05 and I sell it for $6.00, the math is. (2.05 / 6.00) - 1 = 65.8%. My contribution margin on this example is 65.8%, my beer cost is 35.2%.

Another way to establish the contribution markup is to express this as (6.00 - 2.05 = $3.95).

In the beer example we produce a gross contribution margin of $3.95 and a gross contribution margin of 65.8%.

The third and final part of the family we will look at is the contribution from wine. In this example we will use house wine.

My house white wine costs $12 per one-liter bottle and I sell a glass for $11. I pour a 5-ounce portion. There are 35 ounces in a one-liter bottle, so I get 7 glasses per bottle.

My cost is ($12 / 7 = $1.71). My contribution margin on this example is 84.5%, my beverage cost is 15.5%.

Another way to establish the contribution markup is to express this as (11.00 - 1.71 = $9.29). In the house wine example, we produce a gross profit of $9.29 and a gross contribution margin of 84.5%.

When I serve wine, I always want to use a 5-ounce carafe or a portion device to ensure my quantities are always correct.

To summarize things we have liquor, beer and wine all behaving very differently:

Liquor cost of $.42 per portion, beverage cost of 5.8% and a gross contribution margin of $7.53
Beer
cost of $2.05 per portion, beverage cost of 34.2% and a gross contribution margin of $3.95

Wine cost of $1.71 per portion, beverage cost of 15.5% and a gross contribution margin of $9.29

The question that I first want to ask you is this: Who in your establishment has produced and propagated the beverage contribution margin strategy? Who knows which products produce the highest margins and which ones to sell first? Think about your local car dealer. They know which model has the biggest markup and the highest contribution margin. Your beverage operation is no different. This intel should be front and center, not hidden in a well.

In your banquet and catering operation, what products are your sellers actively promoting? When a client presents themselves with a budget and needs your help to put together their event, you have an excellent opportunity to steer them in the highest profitable direction. In your restaurants and bars, do your servers know what products to offer first? Do they understand the difference between the contribution margin and the beverage cost? I bet most of them do not. You now have an excellent tool to use to help get your service staff to sell the most profitable items first.

Clients often know exactly what they want but they also in many instances are looking for suggestions, help and service.

Learn to serve what profits the most first.

David Lund

David Lund is The Hotel Financial Coach, an international hospitality financial leadership expert. He has held positions as a Regional Financial Controller, Corporate Director and Hotel Manager with an international brand for over 30 years. He authored an award-winning workshop on hospitality financial leadership and has delivered it to hundreds of hotel managers. David coachs hospitality executives and delivers his Financial Leadership Training throughout the world, helping hotels increase profits and build financially engaged management teams. He speaks at hospitality company meetings, associations and he has had several articles published in hotel trade magazines and he is the author of three books on Financial Leadership. David is a Certified Hotel Accounting Executive through HFTP and a Certified Professional Coach.


Finance & AccountingGlobal

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