July 29, 2022 by Adam Hoeksema
Opening a bar could be a great way to combine a social presence with a financial investment. Or, depending on your strengths, it could be a valuable local service or a simple, passive income for a much larger project. A bar can be anything you want it to be, as long as it survives to become an establishment, and can be a pet project or a sincere business venture.
Bars and nightclubs are part of a $27 Billion industry, with gross profit margins that are higher than many other retail companies. However, plenty of them don’t make it, and this is usually because of poor planning.
Still, with the right forethought and arrangements, you could be turning a profit relatively quickly. But how much do bar owners make? Keep reading to find out.
How Much do Bar Owners Make?
Bars come in several different shapes and sizes, and these vary due to a wide range of factors such as where it’s located, the available market, the budget, and the image of the bar as a place for people to gather. Bar owners, therefore make different money, depending on the profitability of the bar itself, which in turn is influenced by these factors. Let’s take a look at some of them.
There are no particularly distinct legal definitions of the different types of bar, so they can be classified into an almost infinite variety, for this article, let’s break them down into four popular types for comparison:
- Music bar – This is the kind of place with plenty of seating and room for a stage. It might be the venue for pub quizzes or open mic nights and appeals to a wide range of customers. It’s usually in a good location in town, and reasonably cheap, but still comfortable enough for families to have lunch in during the day. These bars may bring in revenue around the national average of $28k a month. The nature of these bars means they’re more recession-proof than more niche types.
- High-end bar/Nightclub – This could be a stylish venue for various wines and whiskies, champagnes, cocktails, and European beers. The margins are high, but so are the costs, and this will mean it’s important to maintain a regular customer throughput. The location of these bars is particularly important, and there may be plenty of competition.
Again, there’s a tremendous range in revenue for bars like this, depending on the market, but bars with $5k minimum tables could easily bring in $1M a month if they’re being filled. These can make the biggest profits but the overheads are so high that it can be a risk if it proves hard to find customers.
- Gastro pub – A classic, possibly Irish, foody pub with a great range of meals, cooked in-house. There might be a few TVs showing the game and possibly a pool table, but this is the kind of place that bridges the gap between a bar and a restaurant. Food typically has a lower profit margin than booze, but combining the two does boost sales in both.
The quality of the food is important here, so the revenue ranges depending on how well the kitchen is run. In an average city or suburb, expect revenue of around $27k a month, roughly the national average. A well-run bar-restaurant can be a great money-maker due to its wider market appeal and the fact that it can run all day.
- Dive bar – this is a hole in the wall full of cheap beer, hard liquor, and rock music. It’s popular among people who want a no-frills drinking experience and prefer a dim neon glow over natural light. It’s usually smaller than the other bars and the customers are typically going to be regulars from the local area. The profits on a dive bar are largely variable depending on how well it’s run, but the revenue may be much lower than average. These are typically bars for people who want to be on the front line and interact with their customers directly.
Realistically, there are hundreds of variations on these bars, and countless more atmospheres to choose from, but for the sake of example, we’ll go over the differences between these in the context of profit.
Alcohol sales come with a huge gross margin. Sometimes up to 80% or more. However, they also come with a lot of costs and a lot of competition. For example, average bartender salaries may be $12 but for high-end bars, a trained sommelier or cocktail maker is going to be significantly higher priced, and rent for those locations may be through the roof. After the pour cost of the drinks, you’re looking at a net profit margin of much less, if the bar succeeds at all.
Is Owning a Bar Profitable at All?
There’s a popular myth that 90% of restaurants fail in the first year. This trope extends to the service industry in general and on further inspection, appears that it’s not remotely true. However, it has been shown that service companies with fewer than 20 employees are more vulnerable than those with more.
Still, the failure rate itself is falling over time, and barring some freak events like pandemic lockdowns, the success rate of bars should remain on an upward trajectory. The success or failure of a bar, like any other business, depends on how well it’s planned.
So, are bars profitable? There’s no absolute answer to this question, but what can be almost guaranteed is that a bar, as with any other business, will be profitable if it brings in more money than it spends.
As obvious as that seems, whether or not a bar is profitable will be determined by the revenue and the costs, and it’s not always obvious what these costs will be, or how to calculate the expected revenue. So, to get you started, we’re going to break some of them down here.
Costs of Opening a Bar
- Startup costs – these are generalized and will vary depending on whether you’re buying an existing bar or starting one from scratch. It’s cheaper to buy an existing company, but it won’t have your character in it, to begin with. These costs also differ based on bar type, location, and the other factors we’ve mentioned in the previous sections.
- Inventory – The bar needs to be stocked, and alcohol can be expensive. With proper market research, your inventory should match the needs of your clientele, so you should be able to identify these costs pretty accurately before spending a dime. Tables, TVs, pool tables, as well as glasses, towels, and any appliances for washing or cooking, should you need them, all fall under this category. Not to mention tables and stools for your customers to sit on.
- Staff – these need to be paid on time, regardless of whether your bar is profitable. That means having plenty set aside to cover the months of startup. Again, top talent will cost you a lot more than basic bartenders, so hire accordingly. Basic staff will take a lower wage, but if you need someone to make cocktails, or someone who understands which wine goes with which snack, expect to pay extra. Managers, cleaners, and security should all be considered too.
- Licencing and insurance – these all need to be cleared up before you open, and can take a long time to sort out. Taxes and licensing will also vary on location, so be sure you’re covered correctly. Liquor and business licenses should be up to date and relevant to what you’re selling, where you’re selling it, and the hours you plan to be open.
Before opening a bar, it’s important that your business plan contains detailed information on all of these variables and everything else relating to your company’s direction and vision. Most importantly, your financial projections need to be reliable and accurate and to help with this, we have a financial projection template specifically for bars and restaurants that you can use. A detailed financial report is critical for investment and to figure out where and how to maximize your bar profits.
Ongoing Costs of Operating a Bar
- Rent – your location and the size of your venue will determine the cost to rent. If you’ve bought it outright, you might have to factor in mortgage payments, or taxes on the building, but these will be unavoidable costs, regardless of whether you’re turning a profit or not, so it’s useful to have plenty of backup money to cover six months of down-time, as a safety net.
- Marketing – Depending on your clientele, this could be costly or almost free. High-end bars will usually spend the most on marketing to attract the highest-value customers, and dive bars will probably be at the lower end of this spectrum.
- Staff – Your staff will likely change over time, as your business adjusts to market needs and finds its balance. Expanding, upskilling and other staff-related costs should be factored into the growth or adaptation projections for the company.
With all these in mind, it’s important to know exactly why you want to open a bar in the first place. There are plenty of positives and negatives that affect the profit margins you’ll be comfortable with. This makes gross profitability only one factor to consider.
Pros and Cons of Opening a Bar
Someone opening a bar as a personal project will tolerate lower financial rewards than someone looking simply to make money. They’ll also handle the negatives that come with running their own business and dealing with problem customers more readily. There’s a lot to consider on both sides of the scale. Here’s our take on some of the common pros and cons of opening a bar.
Since this article is about profitability, it stands to reason that this would be the first perk of running a bar. Bars, in general, do turn a profit, and this can be maximized with proper business approaches. A well-run bar can be a very lucrative project, and once set up well, can more or less run itself.
The other good motivator will be the freedom to run things the way you see fit. Having no boss can be liberating, and making the decisions allows you to have complete control over the direction of the enterprise. Though there are drawbacks to this that we will discuss, there’s a particular satisfaction that comes from being your own boss. These benefits improve as the company succeeds and the owner is more able to dictate their own schedule.
There’s also a sense of contributing to something larger than yourself. A bar can be a place that people visit for years or even decades if it remains welcoming to them. The hospitality industry is all about service, and a bar is one particular kind of service that plays a significant part in people’s lives. While some people just pop in for a drink, others grow up in and around local bars, and they can play a significant role in the lives of many.
Finally, it doesn’t have to be a particularly complicated project. There’s a certain elegant simplicity in welcoming someone in, pouring a drink for them, and filling a need at the same time. All of these perks can be powerful drivers for the success of your bar.
Many of the drawbacks to running a bar come from the other side of the coin to the benefits. Being your own boss is certainly freeing, but also heavily restricting at times when you’re unable to take time off, or have to make all the decisions yourself. It’s no mean feat to get a business off the ground, and you’ll probably find that you’re working longer than full-time hours to get it going until it’s self-sustaining.
You also can’t choose the nature of your customers, and when alcohol is involved, some people may not be pleasant to deal with. This is part and parcel of the hospitality industry and can be an emotional drain.
There’s a lot of competition, too. You’re competing with numerous variations on the same principle, and without good market research or a particular niche approach, you’ll bear the brunt of this competition.
So, Are Bars Profitable?
After understanding all this, we come to the profitability calculations. As should be obvious by now, the variables will be unique to every situation, but let’s take a look at an example profitability calculation to get a feel for what’s possible.
- Business licenses and insurance will set you back an average of $13,000
- Basic outfitting will cost another $20,000
- Inventory of drinks and snacks will rack up another $7000
- Staff salaries will top this up, and for a small bar will amount to at least $10,000 for the first month. You’ll also need some backup funds in the bank, covering several months of miscellaneous costs. Let’s say $100,000
This amounts to $150k; well within the range of $110k to $850k in startup costs that make up the average cost of opening a bar at $480,000. From here, you can calculate your gross profit margin.
Determine your cost per unit. For example:
Let’s say your fixed costs, plus your total variable amount to $50,000 in a month, and you’re expecting to sell 5,000 crates of beer. From this, you can calculate the unit cost as the total costs divided by the number of cases: which is $10 per case. Now you have a unit cost, you can set the gross profit margin accordingly.
To do this, aim for a target pour cost of 20%. This means that unit cost can be divided by 0.20 to find your profit margin. With $10 per crate, this amounts to $50 with your markup, making it just over $4 for a beer as a standard sale price.
These metrics will change depending on the type of drink. For example, wine might go bad when opened and not finished, so factor this into the cost equations. Margins on cocktails will no doubt be smaller due to the skill needed, and the pour cost being subsequently higher.
Ideally, you want to keep this pour cost as low as possible, so adjust the pricing based on units sold, as you go along.
This is a very basic version of profitability calculations but can be modified and scaled for every product sold. In the end, the profitability of your bar comes down to how well you’ve planned it and how well you understand and arrange these financial calculations. Our Bar financial pro forma generator will help do just that.
So, is owning a bar profitable? Bar owners will only make a maximum of what’s left at the end of the day. This means making a profit and despite popular rumors, bars and restaurants still make a generous profit in most cases.
For yours to succeed, you’ll need to regularly generate accurate figures and identify how to price your services fairly. This will depend on your type of bar, the budget of your clientele, the location, and countless other metrics. Then, it’s a matter of designing your menu to fit these variables and making sure you keep people coming back.