Sunday, January 17, 2016

Economics of Owning a Bar

Economics of Owning a Bar
By Evan Tarver | January 12, 2016
The bar, tavern and nightclub industry in the United States is expected to have total revenues greater than $24 billion in 2015. Of the total sales, 42% is made up of beer, 31% is made up of distilled beverages, and the remaining 27% is made up of food and other sales. The average revenue per employee for a bar establishment is roughly $64, making it an attractive business for an entrepreneur. However, there are over 65,000 bar and bar-like establishments in the U.S. alone. This means there is high saturation in the industry, making it challenging to own a successful bar. Still, it is important to understand the economics of owning a bar to assess whether ownership is the correct decision.
Startup costs are the first major hurdle to bar ownership. Total startup costs for a bar that rents or leases its location are estimated to be between $110,000 and $550,000, depending on size. A bar that purchases its location and pays a mortgage has an average startup cost of between $175,000 and $850,000. Already established bars for sale, on the other hand, provide a potential owner with startup costs of as little as $25,000. These include expenses on all physical assets needed to start up a bar.
Licenses, permits and insurance are also needed. All bars must register within the state of operation, obtain permits and purchase business licenses to sell alcohol. Costs of the license vary from state to state and require different application processes. The New York State Liquor Authority, for example, issues Alcohol Beverage Control licenses to bars within the state of New York, for a fee of around $4,500.
Other operating costs are needed to run and maintain a bar. First is the product, which can run more than $6,000 for food and alcohol. When ordering alcohol inventory, it is recommended to purchase 45% beer, 40% liquor, 5% wine and 10% mixers. An average of $13,000 per month is needed for a properly staffed, average-sized bar. Rent runs an average of $6,000 per month.
Assuming the bar is established and ready to launch, there are possibilities for excess returns. While the amount a bar can earn depends on size, location and other factors, an average bar makes between $25,000 and $30,000 a week. This is assuming average-priced drinks of $8, average main dishes of $13 and average appetizers of $6. It is widely accepted that bars can make between 200 to 400% on drinks served, providing attractive margins for bar owners.
Economic Bottom Line
Putting all the numbers together, it is easy to see what is needed from a profit and loss perspective to run a successful bar. First, for small to average bars, it costs around $110,000 initially to rent and prep a place for operations. Roughly $4,500 is needed for a liquor license, and along with smaller costs for permits and insurance, it is safe to assume a total of $5,000 is needed. The amount of $6,000 is needed for the initial product, bringing the total cost, prior to operation, to roughly $121,000.
Once the bar is open for business, an owner needs to spend $13,000 on staff, $6,000 on rent and a small amount on utilities and miscellaneous monthly purchases, bringing total monthly costs to $20,000. This does not include inventory replenishment, which can be done periodically for a smaller amount than the initial $6,000.
This means an average bar has monthly revenues of $25,000, monthly costs of $20,000 and monthly profits of $5,000. With an initial investment of $121,000, a bar owner can expect to pay himself or his investors back in a little over two years. However, these numbers are all based on averages and do not take into account the sweat equity needed to start and run a successful bar.
Read more: Economics of Owning a Bar | Investopedia
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