There are myriad questions to ask when opening a bar. One of those is simple on its surface: How much money should the business make?
One answer is, of course, enough to cover costs and generate a profit. Another answer for restaurant operators is enough to cover expenses and operate at a profit margin between zero and 15 percent (or greater, ideally). Yet another way to answer that “simple” question utilizes the average profit margin for restaurants, which is between three and six percent, depending on the source.
When it comes to bars, the goal is to achieve a profit margin of 80 percent. In 2018, Toast published an article utilizing BevSpot data that identified an average pour cost between 18 and 24 percent. It’s generally accepted that bars can see profits of up to 400 percent on drinks, and Toast and BevSpot calculate that bars see average profit margins of 78 to 80 percent.
What makes this question difficult to answer is the word “should.” So, let’s replace that hard-to-quantify term with “can.” Now the question is looking at potential, and there are several ways to calculate that potential. One is to divide the square footage of dining and bar areas by annual sales. Another is by looking at bar and restaurant teams.
In simple terms, servers and bartenders can be considered sales teams, back of house and bartenders are production teams. Without production there’s nothing to sell, and without sales teams there’s no selling.
According to the most current data available from Statista, average revenue per employee in bars, restaurants and nightclubs in 2017 was $74,540. From 2003 to 2008, revenue per employee in this business was on the rise. It dropped by more than $4,000 per employee in 2009 to $57,060 and then rose steadily through 2017 (forecasting the data for 2012 to 2017).
Give this a read: Beat the Odds: How Systems Help Operators Boost Profits & Thrive
That’s just an average, however, and it doesn’t tell the whole tale. Every operation and market is different, and the expenses operators have been facing for the past several years have been increasing. Increased revenue per employee doesn’t translate to an improved profit margin when costs rise too.
So, the answer to the question at the top of this article really comes down to learning to increase profit margins, which comes down to efficiency. And efficiency boils down to understanding and monitoring metrics. And analyzing metrics means implementing efficient systems.
Sean Finter, founder and CEO of Barmetrix—and an operator himself—is committed to systems and, as the name of his hospitality services company indicates, metrics. When he and his team are brought in by a client, they study the employees. One goal is to identify the various tiers of employee performance: bottom, middle and top.
Just looking at the bar, when a top performer is paired with a middle-tier performer, Finter explains to operators that they’re losing money each hour. It breaks down like this:
- Top-tier bartender is generating $1,000 per hour.
- Middle-tier bartender is generating $400 per hour.
- The operator is losing $600 per hour by not having two top-tier bartenders working together.
Putting systems in place to analyze metrics improves efficiency. An efficient team generates more revenue, and systems that identify peak hours and utilize smart scheduling help reduce costs. When a bar or restaurant boosts sales and reduces costs, profit margins are improved.
When a bar or restaurant is firing on all cylinders, experiencing growth and is characterized by a culture of winning, it becomes easier to recruit top-tier performers. As Finter and other industry coaches and consultants say, A-level players want to work with people who perform at their level. Studying metrics to analyze employee performance can help operators identify top performers and improve recruiting efforts.
Give this a read: Want to Increase Profits? Download our Profitability Guide Today
Building a team of A players and improving profit margins becomes more efficient when systems are put in place. Technology has made tracking metrics easier than ever before and made smart scheduling possible. Rather than focus on what they think their bars and restaurants “should” make, operators must implement systems that can help them make effective changes to eliminate costs and improve margins.
Want to learn more? Sean Finter is hosting the in-depth workshop “Risky Business: The Systems for Beating the Odds in the Bar Business” on Monday, March 30 at Nightclub & Bar Show 2020. Seats are limited, so register today and claim your spot! Technology will also have a massive presence at this year’s Nightclub & Bar Show in the NxT Pavilion, where attendees will have the opportunity to test brand-new bar and restaurant tech coming to market that’s designed to improve operations.
Pekala, Sarah. “3 Tips on How To Increase Your Bar Profit Margin.” Toast, Inc. May 15, 2018.