When you walk into a busy bar or restaurant, it’s easy to assume that the establishment is raking in the profits. However, it’s actually much more challenging to run a highly profitable bar than most people realize.
There is a tremendous amount of competition in this industry, and other bars can easily copy your successful format in order to appeal to your customer base. In addition, there are always trendy new concepts popping up that will draw a big crowd looking to see what the buzz is all about. Therefore, it’s crucial that you do what you do very well on a consistent basis in order to maintain a solid clientele.
However, simply doing what you do well often isn’t enough to maintain a high profit margin. While the profitability range for restaurants is quite broad (0-15%), most establishments fall in the range of 3-6% profitability. Even the most successful bars will experience profitability in the 5-10% range. This forces you to get creative in order to ensure your bar is at the high end of this spectrum.
The High Profit Margin of Alcohol Products is a Bit of a Myth
It’s undeniable that alcohol products provide the largest profit margins for bars and restaurants. They are significantly more profitable than food sales. However, the profits you generate from alcohol sales may not be quite as robust as many people expect.
Let’s consider what should seem like an obvious example of a product yielding a very high profit margin – well vodka. If you buy a bottle of well vodka for $5 and it contains 22 1.5 oz. servings that sell for $4 per drink, it looks like a very profitable item. You’re spending $5 to generate $88 in sales, which is a significant profit for such a small expenditure.
However, simply looking at the sales revenue generated by this bottle is a problematic approach:
- We’re only evaluating the profit margin of one of the most profitable products at a bar. While margin on this particular product is excellent, the margin on many other products is much lower.
- This figure doesn’t account for many of the other costs incurred by a bar such as rent, overhead, maintenance, credit card processing fees, employee costs and insurance. When these factors are included in our calculations, the profits generated are actually much less than the $83 you clear after the cost of the bottle.
While alcohol products are a great source of revenue, these profits are somewhat balanced out by the other costs associated with running your business. This is one of the main reasons many bars achieve such a low profit margin, and it forces you to get creative in order to increase your profitability.
Strategies for Boosting Profits
There are two main ways you can increase profits:
- Increase sales
- Increase profitability
There are several ways in which you can try to increase sales:
- Increase how much is being spent per customer – This is typically accomplished by promoting shots, upselling desserts, and enticing your customers to order items that they normally wouldn’t if your staff hadn’t been so persuasive.
- Attract new customers – This isn’t always easy to do. It requires you to go beyond your typical marketing efforts in order to reach a broader group of people. The challenge is that you need to spend money on marketing to generate this new business, so some of the profits you’re making are offset by the money you spent to get these customers in the door.
- Broaden your offerings – If you can expand delivery services or run special events, you can potentially increase revenue.
Many bars already use these tactics on a regular basis. The reality is that while increasing sales can help boost your profits, achieving significant revenue growth in this way can be hard unless you are experiencing a serious boost to your sales volume.
The concept behind increasing your profitability is to do the same with less. The challenge here is that you’re spending this money for a good reason:
- If you try to save money by purchasing less expensive food, you’re going to end up serving lower quality food to your customers.
- If you cut staffing to save on employee costs, you may sacrifice the level of service you provide.
- If you put off maintenance projects at your bar, the atmosphere may suffer.
In all of these scenarios, you risk providing a poorer quality customer experience.
Cutting costs while maintaining a great customer experience can be difficult, but there is one way you can increase profitability without sacrificing your overall product. Your inventory efforts can be used to reduce shrinkage, improve staff accountability and lower your liquor cost. When this occurs, you can successfully improve your profitability without sacrificing the quality customer experience you have become known for.
Bar-i can Lower Your Liquor Cost by 3%
When we did a study of all Bar-i clients in 2017, we found the median monthly sales generated by the bars we worked with were approximately $40,000. We also found that our inventory software has consistently helped our clients improve their liquor cost by about 3%.
Let’s look at how much money you’d generate from lowering your liquor cost in this manner. To be conservative, we’ll discuss an example where a bar generating $40,000 in monthly sales experienced a 2% improvement in liquor cost. This is a figure you can realistically achieve when using Bar-i’s inventory system.
In this example, a 2% reduction in liquor cost would lead to an additional $800 per month in profits if you are generating $40,000 in sales. The cost of Bar-i’s service is $320, leaving you with a net gain of $480 per month. This is an additional $480 each month that you currently aren’t making, and you haven’t had to cut any corners on your operations in order to generate this revenue.
If you were to gain an additional $480 in monthly profits by increasing sales, it would be much more challenging. If you run at a profitability rate of 10%, which as we discussed is on the very high end, you’d have to increase your bar sales by $4800 in order to make this extra $480. When bar sales are $40,000, increasing your monthly sales to $44,800 equates to a 12% increase in sales volume.
You most likely understand how challenging it would be to consistently increase your monthly sales volume by 12%. For many bars, this figure isn’t sustainable. However, this additional $480 in monthly profits is easily achievable when you use Bar-i’s inventory system.
Keep in mind that this figure is actually on the low end of what you are likely to achieve. We worked off of an example where your liquor cost dropped 2%, but most of our clients achieve closer to a 3% reduction in liquor cost. If you lowered your liquor cost by 3%, you’d gain an additional $880 in monthly revenue after paying the cost of our inventory services (based on $40,000 in monthly bar sales).
Inventory is the Lowest Hanging Fruit
Which method seems easier to you? Putting in the consistent work to increase your sales volume by 12% or getting smarter with the way you approach your inventory efforts? For most bars, inventory offers one of the biggest gains in profitability for the least amount of effort.
Since Bar-i provides a tremendous amount of assistance to our clients, you can realistically expect to achieve these gains relatively easily. Upgrading to a more sophisticated inventory system will also provide you with other benefits, including:
- Time savings – Inventory can be completed in much less time, freeing up your managers to spend this time on other aspects of running your business.
- Confidence from knowledge – When you can see detailed data explaining what’s going on at your bar, it will give you the confidence that you have your finger on the pulse of your business. This allows you to make smart decisions regarding how to improve your bar’s overall performance.
- More accurate ordering – Bar-i provides you with an ordering guide that will tell you exactly what needs to be ordered each inventory period based on a set of dynamic pars you establish. This will ensure you always have enough product on-hand while reducing the amount of excess product cluttering up your storeroom.
If you’d like to learn more about how Bar-i can help you streamline your operations and maximize profits, please contact us today to schedule a free consultation. We serve clients nationwide from our offices in Denver, Colorado.