Theoretical Wine Cost

How well are you performing in your role as wine manager?  The owner wants 29% cost and you hit it every month.  But so what?  Maybe the operation should be running 25% and you have lots of waste. What should your costs be?  Do you have problems in your operation of which you are unaware?  A very quick and easy calculation of theoretical wine cost gives huge insight into your operation.  Theoretical beverage cost is the operation’s beverage cost in a perfect world – a world without over pours, missed comps, bottles not rung up etc.  The top 25 items sold by volume will give you a great estimation of where your costs truly lie. Below are the steps to perform this analysis:

  1. Run a sales by volume report in your POS.  You want a report that shows the number of items sold (glasses/bottles) and the sales dollar figure for each item.
    1. Be careful to catch bottle sizes that aren’t the standard 750ml.  Notice that I put a 1.5L of Gruner in the example.
    2. Place the top 25 items in the excel sheet entering bottle cost, sales price and number sold.  (The numbers needed for the calculation are in blue)
      1. To clarify, you are taking the top 25 items sold, not the top 25 by the glass items and then the top 25 bottle items.  The sheet is separated for clarification purposes.  I didn’t want to write a formula that would be difficult to understand.  Out of sheer laziness, I only put 7 items on the list.
      2. Note on the excel sheet the operation sold a bottle of 82 Mouton.  For the purposes of the theoretical wine cost, we will leave that out of the calculation, as it will skew the cost unfairly with only 25 items.  The impact of this item will be reduced when calculating actual inventory. 

In the sheet, we calculated a theoretical beverage cost of 26.3%.  Pretty good cost for wine.  But this, remember is a perfect world scenario.  I think a variance of 1.5% either way is acceptable. Remember the 1% rule says that every 1% of sales equals 1% of cost, so that gives the operation about $850 ($5680 X 1% X 1.5) of room.  So at the end of the month, the operation should have a cost of 24.8% - 27.8%.  Anything higher OR lower should be a red flag.  One irresistible temptation is to calculate theoretical cost and see the operation is running much lower than theoretical i.e. 2% or more.  Patting yourself on the back and grinning smugly at the kitchen is not a good idea in that circumstance.  Most likely there is an error – missing invoice, over count etc. Remember that any mistake will have a slingshot effect in the next month. Another interesting thing to notice is how much over pouring by even an ounce effects cost.  In this scenario, if the bartenders over pour by an ounce every time, cost rises to 29%.  Ouch.

Lastly note that this is also possible for liquor cost, but is a more difficult process depending how you set up your POS items.  If anyone is really interested in this I can write about how to do it.

This may seem like an onerous task, but after the first couple of times, it is an extremely easy and insightful tool for your business.  Stop thinking you are doing a good job, instead know you are doing a good job.

Theorectical Bev Cost Worksheet.xlsx
  • Is there a book or some other piece of information where all of the formula's for calculating everything related to beverage you could recommend? This is a very important piece of our business and one that I am weak in and would like to be better. Any recommendations would be greatly appreciated.

  • Just FYI...theoretical has an extra "c" in it.  Great information, thank you.

  • Eatec is a great system that also helps you do this without having to do it manually. It is costly but worth it if you run multiple units.

  • Greg and Geoff- Cannot stress how great iI think it is we are covering these topics on the Guild blogs. Last year we put some business questions in the TEXSOM exam and will increase the number of questions etc. in that competition. I often find that people have a weak grasp of this side, the most important side, of our job. I hope to contribute to this in the future as this is 90% of what I do now.

    In further news we just installed a new POS set up exactly the way you have described here where the cost rolls up as you "create" the drink. Also, have to be carefull how things apprear on the guest check or they feel nickled and dimed.

  • Mr. Harrington,

    Thank you for posting this.  I work for a chain restaurant, and we have these systems set up company wide.  We do inventory every week, but I have little to no involvement on the numbers crunching.  I am more and more interested in this area, and I appreciate your last few posts in the forums regarding this subject.