The bar and nightclub industry grew 1.4% in 2019. That's pretty big for an industry with market size of $27.1 billion. It's a huge, growing market and opening a bar can look attractive. But how profitable are individual bars? And does that profitability trickle down into bar manager salary and how much bar owners make? Let's figure it out. First, we'll look at the costs of opening and operating a bar, then at the average profit margin for a bar (the most important restaurant KPI). Finally, we'll cover how much bar owners make a year and whether or not opening a bar is a good investment.
How To Open A Bar?
As a creative entrepreneur and a social butterfly at heart, you may have always dreamt about opening a bar. Whether it be a bustling wine bar or a peaceful beer garden, the liveliness and social aspect of the industry have always captured your interest, and now you want to take the plunge. Deciding to open a bar is exciting, but you probably have some questions. After all, the complexity of opening up can be tricky, regardless of your expertise or entrepreneurial nature.
This guide will help put your dreams into action and lay out everything you need to know about how to open a bar.
Research which licenses and permits you need. Aside from registering your business, all bars need a liquor license awarded by your state authority — be sure to check licensing requirements in your specific state. You also need to think about food-handling licenses, music licenses and various other building permits if you are making renovations to your current space.
Research funding options for your bar. Think about the initial starting cost and the ongoing costs that factor into how to run a bar. Chances are you need capital to get the business up and running, and some bar owners rely on investors when first opening an establishment. Getting a business loan is another option many business owners look into. A business loan isn't just handy for opening costs; it can also be used later for growing your business by investing in inventory, marketing or renovations.
Find the right location. The success of your bar will depend dramatically on its location. When looking at locations, think about how much foot traffic you are aiming for, what the competition is like in the neighbourhood, what your clientele looks like and the average time a customer will ideally spend at your bar. These factors help you determine the size of the space needed and the best neighbourhood. Make sure to avoid areas that are consistently under construction.
Create a business plan. When starting any business, the first step is to create a business plan that will be your roadmap for success. A business plan outlines your vision for your bar and your strategy to grow it. It's a management tool that can help you reach your short-term and long-term goals. Your business plan should include your market and competitive analysis, a description of your products and services, financial costs and an operations plan.
Trademark your name and logo. When you start a bar, the brand you create will build value in your business. Both the logo and the business name leave an impression on potential customers and influence whether someone wants to try. Make sure you take time naming your business, and then make sure you trademark the name.
The average cost of opening a bar is $420,000. Therefore, the average cost of opening and running a bar for the first year is about $710,400.
These numbers consider the cost of both renting/leasing and buying and labour costs. They're meant to give a ballpark figure regardless of how you secure a property and play a major role in your p&l restaurant statement.
It costs about $24,200 per month in recurring operating costs to run a bar. That includes alcohol costs, staff wages, licensing fees, and rent or mortgage payments. This is also called the prime cost. Therefore, it's important to learn how to manage costs for restaurant businesses to succeed.
The average gross profit margin for a bar is between 70 and 80%. That's enormous considering businesses like general retail and automotive are around 25%. And that's mostly because of liquor costs. A beverage program with low pour cost is the beating heart of a good bar or restaurant.
The average net profit margin for a bar is between 10 and 15%. The gross profit margin is the difference between total restaurant sales revenue and the cost of goods sold (COGS). The net profit margin is left of the gross profit margin after all operating expenses have been taken care of. This number depends on the type of bar you're running, though. So let's look specifically at wine bars, pubs, and bar and grills.
Wine Bar Profit Margin
You can expect a net profit margin of around 7–10% for a wine bar. Just a little less than a standard bar. But that can increase considerably if you open a wine bar and wine shop. On one side of the space, guests can drink wine. And on the other side of the space, they can buy bottles of wine. So the gross profit margin on a wine shop will be smaller than a wine bar. But the net profit margin will be a little higher. That's because you'll likely be selling more wine bottle retail than you'll be serving at the bar.
The wine itself has a higher average pour cost than beer and liquor pour costs. But a wine bar has fewer overhead expenses, and markup can be substantial for both wine by the glass and wine price. Read more about how to price a menu. In addition, there's no expensive draft beer system to maintain—and no having to calculate how many beers are in a keg for inventory purposes—and less bar equipment is needed. Think a three-compartment sink, an ice bin, etc. The wine industry is one of the brightest spots in the bar industry. The wine industry growth rate is substantial, and you can be forgiven for wanting to enter the space.
Average Profit Margin For A Bar And Grill
Food has a lower profit margin than alcohol. Restaurants typically fall between 3–5% net profit margin. Food is not marked up as much as alcohol. And the overhead cost of maintaining a kitchen, licensing, and skilled food service workers are substantial. Using LTO (see LTO meaning), bar promotions like happy hour can increase this margin. Just make sure you know happy hour and the best happy hour times. Subtracting the average restaurant net profit margin from a bar's average net profit margin, a bar and grill's average net profit margin is about 7–10%.
Pub Profit Margins
The profit margins on a pub stick pretty close to bar industry averages, which is between 10 to 15% net profit margin. Beer pricing and alcohol pricing are the sources of most pub profits. This is assuming your pub doesn't serve food. Suppose your pub serves food, which puts you closer to the profit margins of a bar and grill. Also, if you serve food, another profit lever to pull is experimenting with different menu types and limiting food costs.
A bar owner's yearly salary will be drawn from or be the bar's net profit margin. The average bar revenue is $27,500 per month, which translates to an average of $330,000 annual revenue. The average monthly bar expenses are $24,200. That leaves about $39,600 net profit annually. If a bar owner took all the net profit, instead of reinvesting some of it back into the bar, the average bar owner makes just shy of $40,000 per year.
Those numbers are based on a 12.5% net profit margin, the average between 10 and 15%. And an annual revenue of $330,000. So if revenue is higher, you can approximate the salary using these numbers.
Yes, opening a bar can be a good investment. The average net profit of a successful bar is more than the average annual return from the stock market, which is the best frame of reference for determining if an investment is good. Over the last century, the stock market has returned an average of 10% on investments. You lose about 2.5% of your purchasing power annually due to inflation. That means you can expect an effective return of 7.5% annually from the stock market. This does not consider the large upfront costs opening a bar requires, though. This only considers annual profits once a bar is up and running.
FAQs About The Benefits Of Owning A Nightclub In Melbourne
Pros And Cons Of Owning A Bar
Reasons To Open Your Bar
- Successful bars have a higher average annual return than the stock market.
- You'll be providing enjoyment and creating a safe neighbourhood space where people can relax. That's a net positive for humanity.
- Your bar will be an employer. You'll be helping your neighbourhood, town, and local population develop.
- The upside is very high. Your net profit margin ceiling is higher than an average mutual fund if your bar is popular.
- If you and your staff know how to upsell, profits can skyrocket.
- You'll be earning a living doing what you like in a fun environment.
- It's the opposite of a desk job. No day will be the same, from designing the bar's layout to its theme and specials.
- You need to know how to manage a restaurant balance sheet.
- Problems With Owning A Bar
- It's a job, not a passive investment. At least in the early stages. You'll have to dedicate time to make your bar a success. And that means a whole lot of bar and restaurant cleaning and bar inventory work.
- It requires a large up-front investment, a formidable barrier to entry.
- Operational costs are high. You have got to spend money to make money!
- A restaurant marketing plan—including restaurant SEO—takes consistent effort.
- You have to work evenings, weekends, and holidays. At least initially.
- There is a high restaurant failure rate, so you need to stay on top of things to make it.
- The Economics Of Opening A Bar
- Every aspiring bar owner dreams about a popular establishment that makes them great money. But before you jump ahead, you have to plan for the costs and financial impacts of running your bar. While the initial cost of your bar depends on the type of establishment you open, there are a few essentials every bar needs:
- Your location, including any renovation or build costs
- Seating and tables
- Equipment (ice bins, blenders, mixers, dishwasher)
Unfortunately, expenses don't just disappear once you open a bar. It would be best if you thought about operating costs as well. Examples of operating costs include:
- Employee management
These costs require careful oversight and management, so your budget doesn't balloon. So why not think about clever ways to minimise your costs from the get-go? First, don't overthink your drink menu. Create a simple and flavourful menu by offering a few drink options, and don't skimp on the classics that everyone enjoys. Complex drink lists often fluster customers and mean you need to carry a greater volume of inventory. You can also offer seasonal specialties or items regularly. A bonus of testing drinks is that a changing menu will keep your customers returning for more.
Use your POS analytics software to run regular sales reports to make cost-effective decisions when opening a bar. For example, use this data to assess which drinks are selling and which drinks aren't, and then you can update your menu accordingly. To create a more efficient employee schedule, you can also assess your busiest and slowest hours. Minimising waste at your bar can save quite a bit of money. Spilled drinks, incorrect orders and spoiled ingredients are considered waste and can add up, increasing cost in your profit and loss statement. If you see a rising trend in these, it might be time to reassess employee training.
Guests at your bar expect short wait times and fast service. Unfortunately, slow and cumbersome payment systems with painstakingly slow processing times won't cut it, so it's important to invest in a robust point of sale (POS) system for your bar. Your POS system should be integrated with a payments processor and use hardware that can accept any form of payment, whether cash, Visa, Mastercard, EFTPOS, American Express, JCB cards, or mobile payments (like Apple Pay and Android Pay). Additional features designed for bar operations can improve your daily processes. Specific things to look for in a point-of-sale system for your bar include:
- The ability to create open tickets that allow you to offer customers open bar tabs. A bar POS system should also be able to add items to an open ticket, as long as it remains open.
- Inventory management allows you to set up your bar menu on your POS and track inventory to determine stock levels. Many bar owners set alerts on inventory, so they are flagged when stock is low.
- A built-in tipping system is easy for customers to use and encourages tipping on every order. Square's tipping system can easily be turned on or off at the POS, allowing you to decide whether you'd like to offer this to customers or not.
- Understanding Inventory
- After you open a bar, it's time to talk to suppliers about ordering inventory. A regular glance in your stockroom to determine how much inventory you have may seem like a simple way to manage inventory. Still, the reality is that bar inventory can be a much more complex scenario. Your first step is to determine what type of alcohol you need. Whether you've decided to serve beer, wine, liquor or a combination of the three, most bars offer a basic level of variety in their selection: house, on-tap and top-shelf.
You may also want to consider what liquor qualities you plan to offer. For example, if you are making a vodka-based drink, you can offer three different vodka brands to your customer. You can also apply this to wine: Have three different kinds of pinot noir on the menu, so customers have options at different price points. Your next step is to evaluate your drink menu and create an ingredient list of additional items you need, aside from the alcohol. This may include mixers or ingredients for cocktails, such as syrups or fruit. This gives you a better idea of your inventory's breadth and where your ingredients overlap between different beverages.
Now it's time to think about how much to order. First, you need to forecast the volume of drinks ordered each night for the week and calculate the alcohol and other ingredients used. This may be difficult when starting a bar, but after the first week, you can use your POS analytics to forecast inventory on an ongoing basis. While it may be tedious, you should keep a close eye on the inventory life cycle and learn how to improve your inventory at the bar to cut costs and prevent waste.
Making Money At Your Bar
You may begin to wonder how much money a bar owner makes with everything laid out. Unfortunately, when first starting a bar, the money you make is likely to go right back into running the bar. And that's okay.
As you begin to build your brand and watch your bar's popularity increase in the local area, you start to reap the benefits and see your bar profit. But you can also actively make adjustments to your day-to-day operations to boost your profits:
Examine drink costs.
It is essential to calculate reasonable drink prices for customers but will still yield profits when you first open a bar. To do this, break down the price point of each ingredient in a single drink and total this cost. That means finding the cost per gram or per garnish of each drink. While it might sound tedious, a detailed breakdown can give you a better idea of how much you make. You can then raise or lower your prices appropriately.
Value customer service.
Customer service is a major determinant for success, especially at your bar. Bartenders with an aloof attitude could be turning customers off. Make sure you are clear about the type of service you expect when recruiting and training your employees. You can also utilise your POS system to implement tools that can help you improve your customer service.
Upselling can be challenging in a fast-paced environment like a bar, but it is necessary to improve profits. Encourage your employees to take a gentle upsell approach by mentioning different brands when customers order or showcase top-shelf liquor at eye level behind the bar. You can also motivate employees to upsell with incentives like bonuses or extra time off.
So, Are Bars Profitable? Like most big questions, the answer is nuanced. Once you're past breaking even, profitability is relative. There are pros and cons to opening a bar. The net profit margin is variable. And you have to compare it to the baseline of an investment in the stock market.m There is one thing that's not complicated, though. When you open your bar, the best chance of increasing the bar's profit margins is getting a hold of liquor inventory control.