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Restaurant Beverage Management: Back of the House

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Restaurant Beverage Management: Back of the House

Author: Cheryl S. Stanley, Lecturer at Cornell University | December 2017

Back-of-the-house beverage management covers much more than the selection of wine, beer, and spirits
The practice requires great attention to detail and involves purchasing, pricing, storing, and more
Tight margins and a shifting customer base have led restaurants to place a greater emphasis on beverages

image of three wine bottles stored on their sides

BEVERAGE MANAGEMENT DEFINED

Some think that beverage management covers only the selection of wine, beer, and spirits, but the topic is actually much broader and encompasses a great deal of detail. In short, beverage management addresses the proper management of beverages within a hospitality operation, and its goal is to optimize revenue through proper purchasing and inventory processes, and to enhance the operation through menu development and product selection. This article will address only back-of-the-house (not front-of-the-house) beverage management and will serve as an introduction to the topic.

IT STARTS WITH A CONCEPT

Beverage program philosophy and menu development for beverages – both aspects of beverage management – can be inspired by many different ideas, but it is critical that they be based on the hospitality operation’s concept. I say this in order to put beverage management into a broader context, but these issues are far too broad for me to tackle in depth here. As a brief introduction, I will say that concepts can take many forms, including the following:

Playing the food or beverage off of one another is a common concept. For example, if the concept is Mexican, having beers from Mexico or traditional Mexican drinks, like horchata, can enhance the experience.
The “local” movement is a trend that could be the basis for a concept. Being consistent between the food and beverage sides of this concept (i.e., making it known that local farms and wineries supply your food and beverages) will demonstrate to guests that the operation is knowledgeable and aware of its local surroundings. That said, be careful when basing your concept on a trend, as the trend could endure and become the norm or it could turn out to be a passing fad. An example of this is flavored vodka. While citrus vodka was a trend that is now the norm behind the bar, there are signs that some creative synthetic flavors are not here to stay.

Plan ahead before finalizing your concept

Once a concept has been created, you should review certain aspects of your operation before deciding on specific beverage products and quantities. Again, I will not go into great detail here, but will provide a brief summary of key points.

Finances
Non-alcoholic beverages, such as a soda program from a soda gun with a bag-in-a-box system, are generally supplied by using leased equipment and require an initial product purchase. Make sure that you have the required funds.

With alcoholic beverages and some specialty products, such as bitters, terms of payment depend on the state in which an operation is doing business. For example, some states require payment for products up front, while others have 30-day payment terms. Because product turnover is not guaranteed within the payment terms, it is imperative that you have the financial liquidity required to cover the purchase.

Storage
Your beverage program will impose physical requirements on your facility. In particular, you should consider your storage space – including temperature- and humidity-controlled areas and refrigeration – in light of your beverage plans. An easy way to lose money before a product can be sold is to store products like beer and wine in warm or hot rooms under bright light.

These various considerations should take place on an ongoing basis, not only when a food and beverage operation is first opening.

PROFIT MAXIMIZATION

At this point, a concept is in place and both your bank account and your facility are ready to begin beverage selections. Now is the time to focus on profit maximization, which encompasses everything from purchasing to storing to selling the products.

First and foremost, a hospitality operation needs to perform market and trend research in order to forecast sales of beverage products.

How much to purchase

First and foremost, a hospitality operation needs to perform market and trend research in order to forecast sales of beverage products. Forecasting cannot be generalized across the industry, so each operator must do the research and analyze sales to see what is and what is not selling. Based on this research, par stocks – your minimum required inventory level for each beverage – will be set. The decision may get more involved, however, because there may be other factors to consider, including the following:

Volume discounts apply when purchasing beverage products, just as they do with certain food products. The more you buy, the more discounted the price. Note that some state liquor authorities require prices to be posted for all customers, but it is possible that odd quantities or extra-large purchases might result in different prices.
If a restaurant does a high sales mix of assorted wines by the glass, the manager needs to purchase quantities that can last the operation a few weeks instead of just a few days because the product turnover is fast and volume discounts can benefit the financial bottom line.
For some wines, broken-case fees (charged by the distributor when the company is forced to sell only part of a case of wine) can apply. If the operation will sell a full case in a month, whether the case consists of 3, 6, 12, or 24 bottles (the latter can apply when dealing with 375 ml bottles), purchase the case.
If a wine is very popular and unlikely to remain on the market very long, then purchase a reasonable quantity for the operation while keeping in mind that the inventory will sit on your financial books until it is sold.

When considering these factors, remember that decisions about product quantity must ultimately be tied to the financial liquidity of the operation.

When to purchase

A basic operational rule is to be fully stocked for the busiest time periods; so if Friday and Saturday nights are your busiest nights, make sure to have all of your product in house and ready to be sold by the weekend. Unfortunately, creating a purchasing timetable to achieve this goal can be a challenge, because despite the best sales forecast, it’s impossible to know when a large party will consume the entire inventory of a particular wine and cause a supply shortage.

The key to success in timing your purchases is constant monitoring of inventory.

The key to success in timing your purchases is constant monitoring of inventory. You must constantly monitor product based on the par stocks set up by the operation, and you must also monitor changing business demand through metrics such as private dining room reservations or, if you are a hotel, the number of in-house guests. You must also note when your beverage orders will arrive – some distributors will deliver only one day a week, while others, depending on the operation’s location, will deliver five days per week.

Futures and direct import

Depending on the operation and regulations in your jurisdiction, purchasing wine on futures or direct import can be a smart purchasing decision. Below are brief descriptions of these two purchasing options.

Buying on futures is the process of purchasing wine before it is released, which can be a great way to save money on a product that could yield a strong return. The process does involve risk, however, as once you receive the product, its market price might be lower than the futures price that you paid (i.e., you overpaid). Purchasing futures is a common practice for many Bordeaux Chateaus and some high-end California wines.

With direct importing, an operation commits to purchasing a certain amount of wine from an importer or a company before the product ships from the producer. No money is paid up front, and all of the product must be delivered to the operation by the end of a designated period. The early purchasing commitment allows operators to buy at reduced prices because it lowers risk for the seller; but if the product does not sell, the operation will keep the product in inventory until it does.

Both of these purchasing options are open to all types of operations, but you must consider your operation’s finances before committing to product.

Proprietary and private labels

Proprietary and private labels have increased in popularity, and they can lead to higher profit margins because they are exclusive to a given operation. Producers that offer proprietary products can supply restaurants with individualized products that are not available at any other business, and producers can also bottle an already-developed product with a private label that displays your restaurant’s name and logo. The benefits of proprietary and private labels are not limited to wine and extend to specialty beer, coffee, and tea blends.

These types of products can be appropriate for both single-unit operations and multi-unit businesses, depending on the sales and size of both the hospitality operation and the product producer.

Strong vendor and distributor relations

Having strong working relationships with vendors and distributors can assist with profit optimization, and such relationships include strong communication that allows the business and the distributor to know when current and future products go on special, when new products enter the market, or when close-out or end-of-vintage specials are available. This communication can develop during one-on-one meetings and through phone/email communications, and the two parties should set expectations regarding the desired communication methods.

Every state handles distribution of alcoholic beverages differently, so you have to do your homework.

Every state handles distribution of alcoholic beverages differently, so you have to do your homework. That said, there is generally more flexibility in terms of products and pricing options available for operations in states where the state does not control distribution (i.e., where the state does not distribute and control the sale of alcohol).

Proper storage

As mentioned previously, proper storage of products is imperative to proper beverage management. A business can purchase the correct amount of a beverage, price it so guests will buy it, but still miss the mark by ruining it due to poor storage. Many times operations do not believe that beverage products such as beer, wine, and spirits can spoil, but, in fact, they should be treated like food products and stored within the proper environment. Failure to do so will require discarding the spoiled portion of unused inventory, and the cost of replacing this inventory reduces profits.

When it comes to storage, understanding the product is crucial. Beverages’ peak consumption times (i.e., the best time to consume a product) are determined by their type, style, bottling format, closure method, and storage environment; different products have significantly different storage requirements. For example, an IPA beer can deteriorate in quality in 90 days, whereas a first-growth Bordeaux wine from a top vintage can live for over 20 years. Additionally, non-alcoholic beverages, such as coffee and tea, have a limited shelf life and need to be stored correctly.

Stock rotation

Stock rotation is the practice of placing older inventory in line to be sold ahead of newer inventory, with the goal being to ensure that products are consumed within the proper time frame. Products that are not rotated correctly can deteriorate or perish, causing the operator to lose money due to product spoilage. A one-size-fits-all approach will not work when it comes to knowing how to rotate each of your products, so you will have to do your research to determine the peak consumption periods. It is not practical to address the appropriate rotation practice for every type of beverage in this article, but here are a few examples:

Non-vintage sparkling wines need to be rotated, as this wine has been blended and is ready to drink upon release into the market.
Vintage products, such as a vintage wine, can potentially get better with age and can either be stored for a time or consumed immediately, depending on the vintage, wine quality, concept, and wine program philosophy.
IPA beers need to be rotated, as they lose flavor and aroma as they age. This style of beer benefits from being young, so it is advisable to work with the beer distributor to have the freshest product delivered and then to sell it promptly to ensure the quality of the product served.
Coffee and tea need to be rotated to ensure proper aroma and flavor.

INVENTORY MANAGEMENT

Inventory management is the management of stock, and it can be done by hand or with different types of available technology. I addressed related topics in the Profit Maximization section above (i.e., proper storage and stock rotation), and here I focus on additional inventory management issues, starting with the two main styles of inventory management.

Two styles of inventory management

Monthly
The most common time frame for “doing inventory” is monthly, and it involves counting your product on either the last day of the month or the first day of the following month; comparing the results to the previous month’s sales, transfers, and waste numbers; and then investigating any discrepancies. Depending on the size of the inventory, this process can require many hours if done manually.

Some high-volume operations conduct inventory on a nightly or weekly basis, and they are handled the same way as their monthly counterpart.

Perpetual
Perpetual inventory management involves periodic tracking of product coming in and out of an operation. The timeframe is more fluid (quarterly, yearly, etc.), without a specific date for counting inventory. For perpetual inventory management to be successful, business managers must pay close attention to detail and spot-check periodically to ensure the inventory numbers are correct.

Human error can occur with both types of inventory management. For instance, employees may miscount an item due to an improper storage location if they don’t pay close attention to specialty information for beverages such as vintages, single vineyards, particular styles of wine, etc. Errors can challenge the operation’s finances, and both these challenges and the hours required to address them grow as the time frame between inventory checks expands.

Helpful technology

A great number of technology companies have developed tools and applications that can assist in inventory management, and new competitors seem to appear every day. The technology can take many different forms, and it can decrease both the hours spent on inventory management and the margin of error

Operators of any size must conduct a cost-benefit analysis to see if the technology investment is warranted, as it is not for everyone. Factors to consider are set-up fee and time, monthly fees, cost of required accessories, and ease of use. In some cases the cost can be several thousands of dollars.

Human error

Human error will always be part of the inventory management process, and most errors fall under one of four categories: (1) employees misplacing inventory, (2) errors in products received (i.e., wrong item sent by distributor and received by operation), (3) incorrect requisitions (i.e., wrong product requested from storage), and (4) incorrect issuing of product (i.e., wrong product issued from storage or to customers).

To put things into context, human error should be reduced to less than 1 percent of cost of goods sold.

To put things into context, human error should be reduced to less than 1 percent of cost of goods sold. A detailed discussion of how to minimize these errors is beyond the scope of this article, but it is helpful to note that the solutions are based on greater attention to detail, and they are put in place via policies and procedures that introduce controls and checks and balances.

BEVERAGE COSTING

Many factors influence the beverage pricing displayed to your customers, including the costs of the operation, the competitive environment, and the overall beverage philosophy. Operations will choose to use a particular pricing model based on what they think is the best fit for them, and the two most common pricing models are described below. Once a choice is made, the operator can review the various categories of beverages (e.g., beer, wine, spirits, or subcategories within each category) and begin to make pricing decisions.

Cost-of-goods-sold percentage method
The most common method of deriving beverage pricing employs a targeted cost-of-goods-sold percentage (COGS). For example, if a bottle of wine costs $10.00 and the targeted cost-of-goods-sold percentage is 25 percent, the resulting guest price would be $40.00.

Pricing full bottles and ready-to-drink beverages
While wines by the glass can result in waste, bottles of wines, ready-to-drink beverages, and beers by the bottle have no waste because the guest is consuming the entire beverage. Accordingly, these items are easier to cost out, as the entire product is consumed, and a straight cost-of-goods-sold percentage can be applied to all items within a given beverage category.

The cost-of-goods-sold percentage in question generally varies by category. The percentage could be 20 – 32 percent for wine, 14 – 22 percent for spirits, and 15 – 20 percent for beer. Soft drinks, coffee, and tea, collectively, can have percentages ranging from 1 percent for soda in a gun to 25 percent for high-end coffee or tea. Note that these percentages are just guidelines, and as an example, an operation may require lower percentages due to its level of fixed costs or have a lower percentage due to a discounted purchase cost.

Pricing wines by the glass
When calculating wine by the glass, the operation needs to determine the size of each pour. For instance, a 750 ml bottle contains 25.4 ounces, so it can produce six 4-ounce pours, five 5-ounce pours, or four 6-ounce pours. A common industry practice is to run a 25 percent cost-of-goods-sold percentage for wines by the glass, with a 6-ounce pour. After the first glass of wine, the bottle is paid for. Note that some operations are pouring 8 ounces per glass, which yields three pours per bottle; but that practice also means that in terms of your legal liability, guests may be consuming more alcohol in an hour than they can process.

Another pricing method for wines by the glass that involves the cost-of-goods-sold percentage is to add a markup, such as $1, to the price of each glass to assist in covering the cost of potential waste. A drawback of this pricing method is that, depending on the pour size, four or five glasses of wine can cost the guest more money than the price of the bottle. Guests are very savvy when it comes to wine costs, and this outcome can annoy them. The solution is simple: If the guest purchases enough glasses to make a full bottle, just charge the price of the full bottle.

Dealing with waste
When it comes to beverage sales, operators cannot always avoid waste. If a wine by the glass is not selling in a timely manner and/or the operation does not preserve the wine on a daily basis, the leftover wine in the bottle will go bad. This can occur because staff are not knowledgeable about their products, the beverage list is too long, or the products do not match the concept.

When it comes to beverage sales, operators cannot always avoid waste.

To put this issue into context, as a general rule, if a still wine is not preserved correctly at the end of each night with a preservation system – whether it be an air pump or an inert gas, such as argon – the bottle can remain “open” for one or two days (while still closed by a cork or other closure method). A preservation system usually extends this time frame by about one to three days, depending on the wine style. Any waste, or perished product, that is then generated should be charged to the house to account for costs.
Contribution margin method
Another method of beverage costing involves pricing based on a contribution margin. A predetermined contribution margin, which is expressed as a fixed dollar amount, is set by the operation based on how much money needs to go toward the bottom line for each product or serving. This margin is then added to the cost of the product to determine the selling price. As you can imagine, this pricing model results in a variety of costs-of-goods-sold percentages.

This pricing model allows management to easily determine exactly how much each product contributes to the bottom line, but it is more difficult to implement compared to the COGS method because the former requires the operation to know all of its fixed and variable costs. Each operation is different, so one cannot rely on cost benchmarks, and consequently the practice of setting contribution margins can leave too much room for error. For this reason, most operations use the COGS method.

THE GROWING IMPORTANCE OF BEVERAGE MANAGEMENT

Historically, the food and beverage industry has been centered on food. Customers would ask about the type of cuisine or the identity of the executive chef, but not about how many different vodkas or pilsners a restaurant offers. This is starting to change, however, as the customer base shifts and profit margins in the industry are tighter than ever.

Food is still important, but beverages are generating strong customer demand, and their higher margins are making them a driving force in profit.

Food is still important, but beverages are generating strong customer demand, and their higher margins are making them a driving force in profit. This trend is driven by an evolving customer base, and operations need to adapt. An example of this evolution is the impact of millennials, who have a desire for “the experience,” and after growing up with an abundance of accessible products, also demand choice. Food and beverage operations can benefit from this knowledge by having a well-thought-out and properly managed beverage program that creates an enjoyable experience and offers the guest options.

CLOSING THOUGHTS

Beverages are wonderful complements to food, and if managed properly they are also an excellent way for an operation to make money. Too many operations today mismanage this valuable asset, and taking the time to follow the suggestions offered here can assist in increasing your profits.

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