Driving Profits in a Slow Economy

Even if the conventional wisdom is true that people drink during good economic times and bad, the odds are your customers have less money in their pockets now than they did last year and certainly less than they had during the days of cheap gasoline and affordable mortgages. As the current recession grinds on and our discretionary income slowly evaporates, bars and restaurants find themselves competing for a dwindling pool of dollars.

For the most part, ours is a youth-oriented industry. Most owners and managers currently under the age of 45 haven’t experienced navigating a lounge or restaurant through a prolonged recession. Managing a bar during tough economic times changes how you approach every aspect of the business. Things you used to take for granted, like cash flow and a steady revenue stream, assume greater importance. Looking after every dollar and every ounce of profit becomes second nature, a survival instinct.

That said, it’s more valuable to know how to deal with challenging circumstances than it is to have experienced them previously. Keeping your operation running on all cylinders requires a blend of savvy and strict adherence to standard business practices. A large part of your efforts needs to focus on reining in beverage costs and clamping shut all internal sources of loss. The pay-off can be significant.

For example, if your bar generates annual sales of $500,000, reducing beverage costs by 2% will add $10,000 to the bottom line, profit that would have gone down the drain, down someone’s gullet, or out the door in someone else’s pocket.

To that end, the following initiatives have been field-tested and proven highly successful in promoting the growth of new profits, especially when applied in tough times.

• Analyzing sales. While there are numerous methods for analyzing revenue, none have more far-reaching implications for the beverage operation than tracking your bartenders’ productivity or sales per hour. In this instance, productivity is calculated by dividing the gross sales for a shift by the number of hours an employee worked. One benefit of tracking productivity is identifying those on staff with the highest hourly sales. In addition to meriting recognition, your top earners deserve first shot at the busiest, most lucrative shifts.

On the flip side, a bartender with chronically low sales per hour warrants close scrutiny, as the explanation of “why” often indicates a problem. The individual may make lousy drinks, so customers leave without ordering a second or third lousy drink. His attitude could be so off-putting that people don’t stick around for the abuse, or perhaps he works too slowly and can’t physically keep up with demand.
Then again, the explanation could be that the person is ripping off the house. Each dollar of potential sale diverted from the till is another dollar negatively impacting the person’s sales per hour. Every variety of bartender theft will be reflected in productivity ratings.

• Maintaining control. Running a bar requires maintaining a significant investment of working capital in product and inventory, liquid assets that can disappear at an alarming rate. Realizing the necessary return on that investment is a question of control. To be profitable, you need to know exactly what inventory you have, what you paid for it, at what rate you use it, and exactly where it is at any point in time. It requires accurately tracking inventory from the moment it comes through the back door until it’s depleted.

In jargon, this is referred to as “cradle-to-grave” accounting; it involves implementing a series of overlapping internal systems — e.g., purchase orders, requisitions, bar par, perpetual inventory, comp and spill sheets — that track every product through the inventory cycle. While uncomplicated, the key to the system is ensuring that all of the components are in place and being used properly.

• Tracking pour costs. Tracking your bar’s ongoing cost percentages — pour costs — is another fundamental control and a reliable gauge of profitability. As costs of goods increase, gross profits diminish. The more frequently you conduct inventory audits and calculate pour costs, the more insight you’ll gain into the inner workings of your operation with real-time information.

Finding out the bar’s cost percentages is only half of the equation. The direction they’re heading puts the figures into perspective. For example, learning that liquor pour cost is down two points to 19.5 percent paints an entirely different picture than an increase of two points to 19.5 percent. Costs typically shouldn't deviate more than a point between inventory periods. Should costs begin to rise, you’ll be in the position to respond quickly with real-time information.

• Investing in draft beer control. Operators that depend on sales of draft beer to remain financially viable should consider investing in a draft beer control system. Most are capable of tracking every ounce of draft beer dispensed and generating reports detailing exact usage and cost percentages per brand. These microprocessor-driven systems offer an effective approach of closing what has been a chronic black hole for operators. Losses of draft beer in bars and restaurants caused by waste, spillage and theft average one out of every five kegs of beer purchased.

• Applying portion control. Stringently enforcing portion control is essential to remaining in the black. Over-pouring liquor in drinks not only wreaks havoc on pour cost, it often results in customers consuming more alcohol than they’re aware of. There are four methods used to portion liquor at bars — free-pouring, hand-held jiggers, bottle-attached control devices or fully integrated control systems. Each has its advantages and disadvantages relative to your concept, clientele and operational needs.

• Revisiting staff scheduling. For food and beverage operations, payroll is a significant ongoing expense, the second largest after cost of goods sold. To keep payroll in check, some operators schedule the fewest number of staff they can to handle anticipated demand. Invariably, the first casualties are professionalism and a positive working environment.

It subjects employees to undue stress and robs guests of quality service. Spending a few extra labor dollars is better than losing potential sales and making good people wait for bad service.

A better approach is to begin scheduling a bartender and barback — apprentice bartender — to cover shifts too busy to be handled effectively by only one bartender, yet not busy enough to warrant scheduling two. A classic win-win move. The bartender gets the logistical support he or she needs behind the bar and gets to keep a larger share of the tips while the barback gains invaluable experience and, because they’re paid less than bartenders, the business saves on payroll.

Suggested Articles

Governor Gavin Newsom issued the order earlier this afternoon.

General Counsel, Jessica Shraybman, shares her advice for clients looking to negotiate terms with their landlords.

More than ever, we need Congress to help our independent restaurants which are proven to be a foundation of the U.S. economy.