Republished with permission from QSR Automations
Whether you’re just getting started or looking to expand, alcohol sales are one way to generate income. Getting started is no small task. Between a hodgepodge of state laws, keeping the bar stocked, and making sure your guests stay safe, there is a lot to consider. The good news, though, is that alcohol sales drive business, bringing in clientele at off hours. And with the right methods in place, alcohol can be an easy stock to control. Here are some tips (and history) to think through if you decide to make the leap.
First let’s set some context for the complexities of our contemporary relationship to alcohol sales. The United States has a long and often dubious history with alcohol. Some of the earliest European settlers to the country, the Pilgrims, were reliant on beer to survive the journey. Unlike water, beer was comparatively resistant to contamination, a saving grace on a long trek. While various laws were enacted in the burgeoning colonies, the Temperance Movement didn’t gain any momentum until the late 19th century. Alcohol was eventually prohibited in 1920 and repealed in 1933, although vestiges of the practice still hang on today.
Blue Laws and Alcohol
Alcohol laws are the responsibility of each individual state, some with unique or strange prohibition laws. For approximately 18 million Americans across 8 states – all in the southeast – dry counties are a modern reality. In a dry county, alcohol sales of any kind are strictly prohibited. By contrast, wet counties allow mostly unrestricted access to alcohol sales, typically in larger municipalities. In some areas there are moist counties, which allows only the circumstantial sale of alcohol.
Those laws get even more complicated the further you look into it, with specific prohibitions extended to certain times of the night or, in some cases, days of the week. Liquor laws include how you can serve liquor, including how much you can serve customers and your liability (more on that below), and in what type of container. It may restrict things like serving sizes or off-premise sales, and whether or not your business can buy alcohol from wholesalers. You learn more about Alcohol Beverage Control laws by state, to find out more about your area and what you might have to do to comply.
If history has taught us anything, it’s that prohibition has and continues to evolve. Most recently, the ban on marijuana has slowly started to lift in different states around the country, ushering in a new shift. That shift has resulted in some restaurants innovating with marijuana or CBD oil supplements in their food or cocktail list.
Since you never know what the future holds, it’s worth considering if even having alcohol could cut into your overall return. For areas that may have more teetotalers, it may be best to know your brand and think about how it could influence your existing or potential clientele. If you don’t know your area yet, look up the liquor laws and the culture in the area, so that you don’t potentially ostracize customers.
Restaurant Margins on Alcohol
The bottom line in launching an alcohol program is your bottom line: what is the return on your investment? The answer to that depends on a few factors, from the style of restaurant that you run to customer interest and engagement.
For example, if you run a burger joint, it may not be the best environment for a glass of chardonnay. It’s about knowing your audience and balancing customer experience carefully against costs.
Some quick service restaurants like Taco Bell have recently made forays into selling alcohol, focusing on quick and easy drinks with a low learning curve for employees. At the cantina locations that serve alcohol, you can grab a spiked slushy or a beer, menu items that are easy to make and that fit into the efficiency of the restaurant.
Fast casuals like Chipotle or Shake Shack have a little more room for flexibility in the drink menu, measuring price point against accessibility for the customer. You may find a little more of an expanded drink menu at these types of establishments, because people will probably be there longer, even if it’s just by a margin. Table service and fine dining restaurants offer a slower, more paced experience in contrast, and have a lot more latitude in finding just the right drink.
According to the Restaurant Report, “a profitable restaurant typically generates a 22% to 28% beverage cost.” Below, we’ll take a look at some examples of how that might work per drink. Keep in mind that these costs do not reflect local tax on alcohol sales, which factor in to the price of the drink.
Say you want to have a bottle of wine in your restaurant. The United States produces about 800 million gallons of wine every year, accounting for about 17% of the total alcohol market. A 2017 gallup poll indicates that wine is the second favorite alcoholic beverage in the United States, with 30% of drinkers indicating it as their preference. A recent Forbes article indicates that while baby boomers are progressively “aging out” of the market, that Generation Xers are an untapped market. Members of Generation X are identified as between 38-53; you know how that best describes your clientele, so engage accordingly.
On average, the markup per bottle is four to five times the wholesale cost at on-premise establishments. While wine can be purchased in plenty of shapes and sizes, the most common volume sold is 750 ml, or 25 ounces. Standard pour sizes are a 5 ounces, meaning there are approximately 5 pours per bottle in that total volume. Staying consistent on your pour sizes by using wine pourers that measure the volume of each serving will not only help you measure your net gain, but will help you determine how many new purchases you may need.
Let’s say that your cost was $10 for your bottle of wine through a wholesaler. If the average cost of a glass of wine is $9, at 5 pours you have earned $45. That’s a 350% difference between what you paid and what you earned, with one pour accounting for the majority of the upfront cost. The other $36 is all profit.
The same 2017 Gallup poll indicates that among alcohol drinkers, beer is the preferred beverage – the choice of 40% of drinkers – by a more than a 10% margin. The polls shows that men are statistically more likely to prefer beer than women, so use your projected clientele traffic to help direct your efforts here.
Annually, polls indicate that beer is the most popular alcoholic drink, perhaps because of its ease of access. Beer is often cheaper than other forms of alcohol and requires less consideration when contemplating a potential purchase, as drinkers usually know what to expect going in.
The cost of beer can vary by a few different metrics. Is it in a bottle/can or on tap? If it’s the former, then you have a static figure to pull from. Beer on tap requires the inclusion of draft system – an upfront cost, and one that requires upkeep. Additionally, while there are plenty of constants in the beer world, with domestics continuing to dominate the consumer market, the rise of craft beer enthusiasts in turn involves finding sometimes hard-to-find kegs of beer, which may or may not be seasonal or international purchases.
A full keg holds approximately 124 pints of beer per half barrel. Prices vary wildly depending on availability, but a keg of a domestic beer usually costs around $100. If you charge $2.75 per beer, then the value of the keg is $341.00, for profit of $241. Your cost per pint in this scenario is approximately $1.24, and your overall ROI (Overall Return – Cost of Investment = ROI) is 141%.
That same general metric applies to bottled beer. An average markup is approximately $5. If a bottle of beer ran a total of $1.75 from the distributor, that would indicate an ROI of 186%. There are plenty of resources online to help you calculate your markup.
Usually sold in fifths at 750ml, spirits come in a variety of styles and cross a number of genres. While spirits hold only 20% of the public preference, liquor is an additive that appeals to a broader demographic. For some, sipping liquor straight is a tradition. For others, liquor offers the opportunities for cocktails.
Spirits are typically sold as shots, which bear no standard volume, varying by state and venue. While it can vary in terms of total pour size, the national average is approximately 40ml – or 1.4 ounces – which can be monitored by a measured liquor pourer. In total, you can usually extract about 18 shots from a bottle. If the average cost of a bottle from your distributor is $20, and the total cost per drink is $5, then you generate $90.00. Subtracted from your initial investment ($20), that’s a $70 difference and a 350% gain in ROI.
Cocktails introduce a different metric to your costs by virtue of mixers and drink accoutrements.
While cocktails range from simple to complicated recipes, let’s take a look at the cost of an Old Fashioned, which Business Insider identified as the most popular mixed drink in 2018. The recipe calls for 1⁄2 tsp sugar, three dashes of Angostura bitters, one tsp water, and two ounces of bourbon. You can get granular on the cost breakdown, but in general the ingredients add up to about $1.35 in total cost. At an average price point of $8.95, the yield is $7.30, an ROI of nearly 590%.
The ABC’s of your Liquor License
Before you can reap any rewards, you have to get your paperwork in order. Licensing varies from state-to-state, and like the liquor laws mentioned up above, may be different depending on your county. The kind of license you get isn’t only relative to your type of business, but limits how you can work with alcohol. For example, while a Restaurant Liquor License allows you to sell any variety of alcoholic beverage, a Tavern Liquor License requires that if you sell food, your total sales have to be more than 50% liquor.
Find a rundown on the types of liquor licenses you might need or consult your local ABC board.
Getting a Liquor License
Getting a liquor license is a process. It can take around a year in some cases to receive your license, leaving you dry in the meantime. On top of that, the cost can range widely from just a few hundred dollars to tens of thousands. And that’s if you can get one. Some states or counties only allow a limited number of restaurant liquor licenses, meaning that you may either have to wait until one becomes available, or buy one from an existing restaurant.
When you apply, you meet with your local ABC board. There you have to provide all the proper zoning, health, and building permits, as well as the details on how you intend to use it in the business. You may hit snags if you’re too close to a school or in some cases, if neighboring businesses issue any objections. Once you get approved, you have between one and three years to renew your license, depending on where you live.
Keep in mind these statistics are for brick-and-mortar locations. The licensing and upkeep for mobile or pop-up businesses often are a bit more involved, but that’s a subject for another day.
Stocking Your Bar
Understanding the math to keep you ahead of the curve, now you have to stock the bar. That might seem like the easiest step and it can even be fun, but like everything else here it bears consideration. Are you going to keep it simple for a quick turn around? Do you need something that adds panache to your burgeoning drink menu, or well-rounded taps menu for craft beer enthusiasts? Are you looking for a good pairing for your food items?
First up, where do you get your supplies? Finding a wholesaler is a matter of preference, and thanks to Tied House Laws, one that you aren’t obligated to stick with. Tied House Laws restrict the ability of distributors to coerce you into any deal that excludes certain brands or styles of drink. While that’s bad news for retailers looking at vertical integration, it’s good news for restaurants who are just looking to shop smarter and save a few dollars.
In rare instances, a quick service or fast casual might employ an expert to help with drink pairings for their menu items, like Shake Shack has done. By and large though, no matter the size and style of your restaurant it’s about knowing your clientele. If you have the capital, you may consider bringing in a sommelier to help you find the perfect wines to match your menu items, a cicerone, the equivalent for beer, or a mixologist for spirits and cocktails. In the meantime, you can uses sites like beeradvocate.com, cellartracker.com, or distiller.com to compare what is popular with whatever may be available in your area.
Managing Your Bar’s Inventory
You know where to get it and what the profit margin is, now how much do you need? There isn’t a right answer for this, but variety is a good starting point. For example, you might pick up four to five varieties of beer to start, the most common liquors (vodka, gin, bourbon), and the most popular wine varieties. Mix it up not only by style, but price point. When you go back through your books, let your numbers guide you.
Always keep space in mind. If you have a small amount of real estate to work with, it may be ideal to focus on drinks that are easy to store and maintain. Space allowing, you might consider a cooler or a draft system. It goes without saying that the more you have, the more you have to spend. Draft systems can run from a few thousand dollars to around $9,000, depending on the number of taps and the difficulty of installation.
Remember though that it’s not only the upfront cost to get the appropriate gear, but the time spent later maintaining it. For example, research indicates that consumers typically prefer craft beers from a tap system, which creates the potential to move sales. Cleaning your lines is an essential element to keeping your beer fresh and your reputation with drinkers intact, which adds workforce hours to your payroll every week.
Now that you have your stuff, you have to keep track of it. Make sure to standardize your pour sizes, which will include finding appropriate glassware for your different drinks, and the right tools to measure each pour quickly and efficiently. Keep details on your volume and your sales, and using the formula above, you can determine how much was used during a given time period. You can revisit that data over time, mining it to determine what your projected needs will be seasonally, but that’s for later down the line.
Part of that is dealing with dead stock. For better or worse, some things just aren’t going to sell. Maybe it was a gamble to branch into something fresh, or just shifting cultural interest, but there will be plenty of times you’re left holding product that, for whatever reason, stopped moving. Don’t hesitate to place the stale inventory at eye level to the customer as visual enticement, and to publicize drink specials to help move it out.
And learn from your mistakes going forward. If there is stylistic consistency in what stops moving, like a particular variety of wine, beer, or spirit, then move on. It’s not just brands that move products, but plenty of other criteria. Maybe a drink moves better in the winter than the summer? So watch for those sales metrics as they come in and take note.
Keeping inventory will also clue you in to missing product. Since you can account for alcohol sales and the volume of the product, you can get an idea of if drinks are being stolen by staff or given out for free. Or, simply over poured. Catching the culprit(s) can come in a lot of ways, from putting in cameras, to locking up your excess supply. But keeping a good inventory and remaining transparent with your staff about that process goes a long way to keeping them honest; knowing that you do the math regularly, employees will also know that you’re monitoring cost, volume, and which employee is working at what time.
Now that you’re stocked up and ready to go, how do you get folks in the door? The most common answer is the happy hour, a tried and true staple of American culture. If you are in a state and county that allows drink specials, make sure that you advertise in as many ways as possible, so that consumers know where to find you. It may seem like a small consideration, but keeping an updated, public facing menu -drinks or otherwise- is critical to drawing attention. If you don’t have time to update a website every time a menu item changes, you can maintain simple updates by taking a picture of your daily specials and posting them to social media sites like Facebook or Instagram. If you still don’t have time to maintain that information, you may consider training an employee or contracting a marketer to pick up that slack.
Dram Shop Laws
At the end of the day, the goal is a high yield return on your investments, and a positive customer experience. But over-drinking is not only a public safety issue, but a huge potential legal liability for business owners. Many states have implemented Dram Shop Laws, which address this specific liability.
To combat that, there are a variety of insurance policies that cover every potential problem that may come up, from onsite rowdiness, to off-site events that you might participate in. While those policies are not required by law, failure to have them can yield expensive results. It’s best to shop around and find out what’s the most affordable.
From a customer experience standpoint, you and your staff will need guidance on what to look for in dealing with drunk customers. Patience is a virtue any time this might come up, although it’s imperative to remain firm.
If a customer comes in demonstrably drunk, you have the right to refuse service. If they get drunk on premise before you’ve realized it, your bar and wait staff can and should cut them off. You can offer them food or drink alternatives to help too. If this comes up, it may be handy to develop a relationship with local cab companies or to use apps like Uber or Lyft to find a ride home for the customer; patrons involved in an accident while intoxicated, you can be found liable for over serving, so protect yourself.
Encourage designated drivers by building in mocktails and other non-alcoholic drink alternatives into your menu. You may even offer them further incentives to help out, with specials on appetizers as well or through other on-premise activities like games that may keep them engaged on site.
This is a lot to take in, but there is a lot to consider. The profit margin is large, and many businesses report a robust success in alcohol sales figures. Ultimately the cost is time and energy, as the numbers speak for themselves. Do you have the time to invest in keeping up with stock and inventory, training new waitstaff, and installing new appliances for your drinks? Do you have the patience for the unruly customers who may frequent your establishment? Are the legal obstacles and licensing fees surmountable? Look at your current business model and build out from there.