I was speaking to a wine director about the value of running a lower wine markup for the sake of achieving higher sales volume. Very few restaurant operators think about this relationship in a sophisticated way. They usually just pick a number and say please give us a cost of goods sold of 30%...
The fundamental question is for every X points you increase your cost of goods sold, how much can you increase sales volume?
As an example if you sell $100,000 of wine a month at a 30% COGS, that will give you a net profit of $840,000 per year from wine. If you think by running a 33% COGS you can increase sales by 15%—just to toss out an idea—you have a net profit of $964,800 dollars per year. That's $124,800 a year more in the owner's pocket.
If I did my math right, you would only need to increase wine sales by more than 4.4% to see an increased profit if you change your COGS from 30% to 33%. This does not even take into account the potential for increased food sales from a higher guest return rate if they perceive more value.
My first point in creating this post is that everyone should be aware of this.
My second point in this post is whether any math geniuses out there want to create some simple equations for analyzing the relationship between COGS, Volume and Net Profit.
Stephen Gitto It's actually even more deceptively tricky than you were thinking if you think about it in the way you presented it. I still think my statement is true that you would only have to increase sales by 4.4% That is assuming 4.4% increase from the original $100,000. You were doing the math based on an individual unit not on total sales. I know this is confusing but essentially you were assuming that by changing your COGS from 30% to 33%, you would automatically change your total sales volume from $100,000 (in my example) to a bit over 90k by lowering your prices. This of course is not true because people buy not just particular bottles but by price and it affords you the ability to list more expensive wines at the same price you currently are selling wines at. I was assuming keeping the same average sales, not the same cost. The equations get admittedly tricky because we are making different assumptions. Unless I did something wrong that I don't see yet, I still maintain you would need to increase sales 4.5% above present levels (in dollar value, not units) to justify a reduction from 30% to 33% COGS.
Geoff Kruth Were you looking for something like this Google Sheet?
That's cool. You could do the same think for sales of an entire program and average markup