When opening a bar, your mind thinks of the drinks you will serve, your bar design, the atmosphere, and your marketing strategies, but one element that should stay top of mind is profit. Having a clear understanding of your costs and maintaining healthy pricing ensures all the hard work of planning pays off, which makes doing what you love even more fun.
If you plan to own or run a bar, this article is for you. We discuss the costs of opening a bar, the average income you can expect, and the profit margins you should hit so you can keep the drinks coming. We also discuss some handy tips that boost those profits higher.
The Cost for Opening and Running a Bar
Startup costs range from $110,000 to $850,000, with an average cost of $420,000. During the first year, the total cost for opening and running a bar falls around $710,000. This number includes the leasing/mortgage costs, buying all materials and stock (liquor), and paying labor.
Monthly operating costs are around $24,200. This includes a monthly drink cost and ingredients cost, licensing fees, any operational costs, overhead expenses such as labor costs for staff and cleaning the bar, administration costs, payroll taxes, and rent or mortgage payments.
Overall, the average startup cost means should expect to have lower profit margins the first year but that should increase the following year and the year after that.
As a bar owner, your income comes from the bar’s profit. It typically averages about $40,000, though it can be less if you reinvest profits into your bar.
Healthy Bar Profit
A good rule of thumb is to follow the following four key performance indicators (KPIs), and there is specialized bar software to help you track them. At BNG-POS, we often provide this software to our customers.
Prime Costs for Bars
Your prime cost is your operating cost for a given period – in most cases monthly. It is every dime you spend in running your business – and it’s the most important number to know when running your bar.
To determine your prime cost, you need your cost of goods sold and labor costs for the time period. Cost of Goods Sold (CoGS) is your cost for the alcohol and ingredients for each drink, as well as any food costs if you offer it. Labor Costs are all other costs including salaries, cleaning costs, insurance, and payroll taxes.
To get your prime costs, add your CoGS and labor costs together. This number tells you where you fall on the $24,000 monthly average listed above.
- CoGS + Total Labor = Prime Cost
Gross and Net Profit Margins
A healthy bar profit margin is key. Knowing your average profit margin ensures you have the right profit per drink for your efforts and healthy annual profits to get you through each year.
To hit the actual profit you need, you will need a blend of three figures: gross profit margins, net profit margins, and pour cost. They also work on a per drink basis to guide you to repricing your menu for additional profit.
Gross Profit Margin for Bars
Gross Profit Margin is the difference between the total sales minus the CoGS.
- Total sales (revenue) – CoGS = Gross Profit Margin
To know if you have a healthy gross profit margin, you will need to convert it into a percentage:
- Total sales (revenue) – CoGS / Total sales (revenue) x 100 = Gross Profit Margin %
What is the Average Gross Profit Margin for a Bar? Your average profit margin should be 70 or 80% (80% or higher is ideal) to achieve strong annual profits.
Net Profit Margin for Bars
Net profit margin is what is left over when you take your gross profit and deduct your operating costs (all your expenses for running the business).
- Gross Profit – Operating Costs = Net Profit Margin
Like gross profit margin, you will need to convert the net profit into a percentage. The higher it is, the more profitable you are.
- Net Profit / Total sales (revenue) and multiply it by 100 = Net Profit Margin %
What is the Average Net Profit Margin for a Bar? The industry average is 10% and 15%, but your ideal number will depend on the type of bar you open. More on this in a bit.
Your pour cost is a per drink cost percentage. It is an inversion of your gross profit margin. This means if your profit is 80%, your pour cost is 20%. Another way to determine it is to divide your CoGS by your total sales.
- CoGS / Sales = Pour Costs
What is the target pour cost for a bar? The target pour cost for a single drink is:
- Beer: 24%
- Liquor: 15%
- Wine: 28%
The goal is to keep your pour cost as low as possible. The lower the cost, the higher your profit margin.
Drink Prices: Why do Bars Charge So Much for Drinks?
A gross margin of 70 to 80% sounds quite high, especially when other businesses average 25% or lower. Why does liquor fetch such a high sale price?
A big reason for liquor costs is that customers are willing to pay for it, but that’s not all. Some drinks like artisanal cocktails require higher labor and many ingredients that go into their menu price. Some bars charge for the atmosphere and location; after all, real estate isn’t cheap. And then there are unseen costs like refrigeration for the beer and wine, backroom stock rooms, and glassware and cocktail shakers, etc. But the number one reason for the high average price is variance – otherwise known as losses.
Variance comes from broken bottles, freebies, and over-pours, but the biggest reason is theft. According to the National Restaurant Association, theft causes 75% of inventory reduction.
What Type of Bar is Most Profitable? A Look at Bar Industry Profits
Though a net average profit is 10 to 15%, the beverage industry encompasses many types of businesses. There are bars in the hospitality industry, nightclub industry, wine industry, and then there is your local neighborhood pub. The alcohol industry is also huge, and what a business offers to drink is often multi-layered. Still, we can look at types of businesses in the bar industry and get a tighter read on ideal profits.
Pubs: What is the Profit Margin on Beer?
Pub profit margins retain the industry average of 10-15%. This percentage factors in hard alcohol and beer cost, but not food. Think of the corner pub in your hometown.
Bars Serving Food
A bar serving food brings a lower profit margin of between 7 and 10% because food often has a lower average food cost profit margin of between 3 and 5%, reducing the overall average. Like a restaurant, these locations can still be quite profitable due to order sizes and overall demand.
What is the Profit Margin on a Wine Bar?
The ideal profit margin is 7 to 10%. The cost per pour is higher, but you also have more workarounds. For instance, the overhead for wine is often low, and, unlike, say, a bottle of vodka, the wine industry often lets you sell wine by the bottle for increased sales. You also have flexibility in pricing each glass and each bottle. This means a wine bottle converts into more money per oz for more profit. Even though an expensive bottle of wine might have a lower profit percentage than a cheaper one, you still have a high dollar profit.
Wine also requires less work to pour than, say, artisanal cocktails, and it offers an exact price per serving than your typical bottle of alcohol or keg of beer, making it easy to price each bottle into ounces per glass for accurate pricing.
Making It in the Bar Industry: What Every Bar Owner Should Know
Bar industry experts and bar owners recommend the following habits as an industry standard:
- As a bar owner, you should maintain clear daily, monthly, and annual revenue readings and KIPs to know your costs and profit margins. This means tracking every dollar of revenue and accurately charting your cost per drink. Run a daily sales report as part of normal business practice.
- Track stock accurately. With so much lost to theft and freebies, it pays to chart your stock tightly.
- Run a menu item report to keep a tight eye on sales, profits, and potential losses.
Helpful Methods for Boosting Your Bar Profits
Here are some simple tricks you can adopt:
- Decrease your pour costs.
- Review drink prices every couple of months.
- Prioritize drinks with low pour cost and high sales volume.
- Increase the price if possible.
- Track the ingredients in drink items on your cocktail menu: This is particularly important for those astounding cocktails in a cocktail bar. Artisanal cocktails have hidden costs that affect overall profit.
- Standardize drink and food recipes. More consistent cocktails offer a more accurate cost.
- Increase the volume of certain drinks. The higher the volume, the lower you will pay on the backend.
- Make profitable items more visible on your bar menu.
- Provide good service to customers. To maintain a strong customer base, you should train staff well to maintain exceptional customer service and offer a strong customer experience.
- Reduce theft or losses with video cameras.
- Strong inventory management. Here is where BNG-POS comes in…
BNG-POS for Bar Inventory Management, Sales Reporting, and Much More
BNG-POS offers a wealth of hardware and software tools for tracking inventory and beverage costs. Our bar inventory software helps you catalog stock and break down ingredients pricing per drink to tabulate inventory usage rate and maintain strong profit margins. You get tight and accurate reads on what sells and what needs improvement.
Our experience with the industry’s most powerful inventory systems, sales tracking, and operating expenses tracking gives you the tools you reach and maintain the profitability you need. We fuel bars with inventory metrics and sales data to keep them profitable, and we can do the same for your business. Our all-in-one beverage inventory system keeps you in control of your profits. Visit us at BNGPOS.com to find out more.