The Knockbox: Calculating Drink Costs

This article was originally published in Barista Magazine February/March 2024 Issue.

Calculating Drink Cost

I'm just going to come out and say it plain and simple, you should know your drink costs. If you own a business you need to know your cost on everything you sell. Everything! Why? Because this is going to directly translate to how profitable of a business you are able to be. 

Knowing your Cost of Goods Solds (COGS) subsequently tells you your Gross Margin. Here is an easy way to think about it: If you sell a cup of coffee for $1 but it costs you .40c to sell that coffee (the coffee, the cup, the lid, etc) then you made .60c on that $1. You have a 40% COGS and 60% gross margin.

Everyone structures their P&L’s differently but a general rule of thumb that I’ve seen most often is that COGS is everything that leaves the building to make a sale. So, let's use a Vanilla Latte as an example. What leaves the building is: coffee, milk, syrup, cup, lid. You might also add in things like a straw and sleeve as well. These are all the COGS for that drink. 

Doing The Math

Calculating the cost of a drink can be deceptively simple, yet its components warrant a closer look. Let's break down each component:

Cost of Coffee: This represents the coffee used to make the espresso in the drink. You will want to calculate how much a double espresso (the standard of what goes into a latte) costs you to make. To do so you will want to figure out how many shots of espresso you get out of every 5lb bag (again, a standard size bulk bag).

To calculate, divide how many grams is in 5 pounds ( approximately 2268) by how much coffee you use in a shot. Most espresso is between 18-20 grams. So, if you use 20 grams per shot, you get 113 shots per 5 pound bag of coffee.

Lastly, you need to account for waste. Espresso has a notoriously large waste due to dialing in, tossing bad shots, cleaning the grinder each night, etc. I recommend doing some work to figure out your cafe's average waste. For 1 week, have your team count how many shots are wasted each day. Dial in shots, shots they toss because they are bad, every time they purge, and how much is wasted at the end of the night when they clean the grinders. That will give you a more accurate picture of waste. If you don’t want to do that, I would just assume 10%. It's a lot, I know.

So, if we go back to our calculations and reduce 113 by 10% we ended up with 102 shots. Now divide that # by how much a 50 pound bag costs you, let's say $50, that means a shot of espresso costs you ~.49c. 

Here’s the math:

2268 / 20 = 113.4x.1=11.34

113.4x.1=11.34

113.4-11.34= 103.06  

$50 / 103 = .485

Milk: How much milk do you use per pitcher of milk when you steam? Again, do a week of research to determine how much you use. This is a great time to ensure your staff is on the same page and not wasting unnecessary amounts of milk. Divide the cost of a gallon of milk by the number of servings you get per gallon. Remember to consider the difference in price for cows milk vs alternative milks. Alternative milks can be significantly higher than cows milk. Many cafes have an upcharge for alt milks, or they increase their drink prices across the menu to allow for the desired gross margin regardless of milk option and choose not to upcharge. 

Syrup: Much much syrup do you put in the cup? Do you weigh it or measure it? Divide the cost of the bottle of syrup by the number of servings you get. If you are buying a bottle of syrup this will be very simple. If you are making your own syrup then you will need to calculate the cost of the bottle based on the ingredients and volume.

Cup/Lid/Sleeve/Straw: Determine what you want to include here. It's about being consistent across all your drink calculations. Again, the rule of thumb here would be anything that leaves the building when you make the sale. This part is up to you but be consistent. These expenses will still be accounted for in your store's overall profitability, however it is just deciding if it hits COGS or if it does below that line and hits a line or gl code like Expenses. 

Sometimes, the true cost of a drink goes beyond the obvious ingredients. It's essential to consider the hidden expenses that could affect your bottom line. When it comes to your P&L, labor will be subtracted after your gross margin is calculated, however when costing out your drinks for a sake of deciding what to price them at, you may want to add in some additional costs. This could indulge labor, rent+utilities, equipment maintenance, etc. You could choose to calculate this information or use a standard %. 

Labor Costs: For calculating labor into your drink costs, you could calculate how long it takes to make the drink (1-4 mins or so) and divide that by the hourly rate for the role. If you pay $15 an hour, and a latte takes 3 mins, then the labor cost for that drink is .75c. 

Here’s the math:

15/60=.25 a minute

Using The Math

Now that you have a grasp of the basic principles of drink cost calculations, how can you leverage this knowledge to maximize profits and optimize your coffee shop's operations?

Regularly Update Prices: With your newfound insights, you can regularly review and adjust your menu prices to ensure you maintain profitability. This is particularly essential when ingredient costs fluctuate.

Optimize Inventory Management: Maintaining just the right amount of inventory is crucial. Overstocking can lead to increased waste and a deduction in available cash, while understocking can lead to lost sales.

Refine Your Menu: Analyze which items are more profitable and consider promoting them. You may also identify low-margin items that need adjustments or removal.

Barista Training: Proper training ensures efficiency, reducing both the time it takes to make each drink and the likelihood of waste due to errors.

Once you know your drink costs, you can set your preferred margin. You will have two options to adjust your gross margin: Reduce the price of your COGS (meaning reducing the price of your coffee, milk, cups, etc) or increase your prices. Reducing waste will also positively impact COGS. When it comes to pricing your drinks, make sure to take into account a market analysis. You don’t want to be under or too over priced in the market against your competitors. Do a market analysis and compare your drink prices to your competitors each year. What I have seen in coffee shops is generally a 60-80% gross margin on drinks, depending on if labor is accounted for.

The profitability of your coffee shop demands a firm grip on the numbers. Calculating drink costs is a vital component of your business strategy. In the world of coffee, precision and profitability go hand in hand. It is early in the year, and a great time to sit down and take a look at your prices before the busy summer months and make adjustments. I know that this exercise will be enlightening and a benefit to your business and profitability!

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