Having recently returned from a visit to Britain, a title reference to the British “pub”, and a blog post about 5 factors which affects a bar's profits and liquor cost...all beginning with the letter P. Confused? Good. Regardless of what you call your local watering hole, this blog aims to discuss some of the more technical and sometimes overlooked elements which drive the profitability of bars. Carefully considering how these things can be best applied to your business and customers will help increase sales while keeping your liquor costs low. Getting the right balance can be challenging since the two factors (volume and liquor cost) intuitively work against each other. On the one hand customers are attracted to lower priced drinks which may increase sales but selling discounted drinks will clearly increase your liquor cost. First and foremost the goal is to generate sales volume: Full bars generate more revenue and running a super low liquor cost isn’t much use if you’re making a healthy margin on low sales. The good news is that some of the practical steps you can take to reduce your liquor cost are win-win situations whereby a fall in liquor cost can be accompanied by an increase in sales. What’s really important is to carefully consider all the factors which affect your liquor cost and profits so you can make conscious decisions which are tailored to your target audience. The odd tweek can often make a big difference. 

Pricing: A bar which cuts its prices will increase their liquor cost. That’s only half the story though. If the strategy is effective, this decrease in margin will be more than offset by an increase in sales. This tactic of reducing prices in an attempt to increase volume is certainly a strategy bars have employed during the downturn but it's generally best avoided. Since the overall aim is to increase profits, getting this balance between margin and volume right is important. Your average dive bar can be an example of getting this balance wrong. Since dive bars are forced to compete on price, they tend to have low margins and hence low profits. Competing on price should be your last resort as an operator. You need to do as much as you can to differentiate your offering so that people frequent your venue because it offers something unique rather than being the cheapest place around. While that something unique could be your super hot new bartender, we’re aiming for more lasting power! The effect of price changes on the profits of a bar is a complex relationship meaning strategies based on pricing need to be thought through carefully. 

Product mix: While many feel that this is a factor which they have limited power to control (which is true), you can have some impact on the mix of what your customers buy. While many regulars do stick with their preferred drinks very reliably, your aim is to convert a few sales per day into more profitable and higher priced items. The effect of this is cumulative and the every single ‘up-sell’ drink which is served can put another $1 in the register. Some tactics to move your product mix in a more profitable direction include having a great signature drink list or doing specials on your higher priced and higher margin items. You see a lot of bars doing $2 PBRs but a $3 deal on your premium beers will often generate more profit per sale even though the liquor cost may be higher on the transaction. If your happy hour crowd has ‘two quick drinks after work’, you should be concerned with having an attractive offer which maximizes profit per drink rather than minimizes liquor cost.

Purchase price: Again this is a factor you have limited control over. Despite this you do have some control. Every time you are able to benefit from case discounts, or negotiate a better price, you put a few more dollars in the bank. Tricks such as negotiating multi tap discounts on your draft beer or making a conscious effort to free up some storage room so you can order 5 more liquor products by the case make a big difference over the course of weeks and months.

Read part 2 of this post