Source: Motley Fool
By Daniel Kline
March 24, 2014
You would think that the struggling economy and cold weather would drive people to drink, but alcohol sales actually fell in the United States in 2013 and forecasts show them falling again in the current year.
“The overall softening in adult beverage is playing out more in restaurants and bars than at retail,” according to recent analysis by Technomic. “Adult beverage volume in the on-premise channel – comprised of restaurants, bars, and other locations – contracted 1.3%, while retail volume declined .7% in 2013.”
People are still drinking, but they are doing so less often and in general they are being more cautions with their money.
“Consumers pulled back on drink occasions at restaurants and bars,” says David Henkes, Technomic vice president. “Wine and spirits were essentially flat on-premise, while beer declined.”
This is bad news for the restaurant business as alcohol sales are typically high margin. It’s also a negative for the income of waiters and waitresses as drink sales drive up check totals, which leads to higher tips (as can increased generosity that might accompany the consumption of alcohol).
The Economic Impact of Lower Alcohol Sales
“Restaurants that serve alcohol earn a far larger profit margin than those that do not, simply because there is such a high markup on alcohol products,” Restaurants.com writes in an article headlined “How much profit should a restaurant make.”
All restaurants earn the highest profit margins on their beverages, the website wrote.
“Typically, a cup of soda costs $0.20 per serving, while tea and coffee cost $0.05 to $0.07 cents per serving. The markup ranges from 300% to 600%, and carries the lowest cost,” the article continued.
Alcohol has a similar markup. “Wine has a relatively low price per glass, which is marked up between 200% and 600% depending on the type of restaurant and the wine label. Beer costs between $0.60 and $0.70 per serving, and carries an average cost, by the glass, of $4. This earns a markup of roughly 500% to 600%.”
Food prices — in general — are marked up much less with the guideline being, according to Restaurants.com, that “typically, a restaurant needs the cost of a meal to total no more than 31% to 34% of the sale price in order to turn a profit.”
That means food generally tops out with a 200% markup while beverages — alcohol included — bring in a much higher margin. Take away a few percentage points in beer, wine, and liquor sales and it can hurt the bottom line.
Well-run Bars and Restaurants Have Personnel Trained to Up-sell Alcohol
One of the key ways restaurants make money is getting customers to add on to their meals — that can mean appetizers or dessert — but the most profitable option is up-selling alcohol. Nightclub & Bar Magazine explained the concept to bar owners in a recent article .
“By properly training your staff to up-sell, your profit margin could skyrocket and drastically affect your bottom line,” Brian Speed wrote for the magazine.
The tips offered included how to steer a customer who simply order vodka into a higher-end (and higher-profit) brand. The article also covers training staff so they can explain the difference between a rum and Coke made with generic alcohol and one made with a better class of rum.
Not All Alcohol is Failing to Sell
“There were categories and segments that did well on-premise, thanks to creative presentations and programs, and on-trend flavors and formats,” Henkes said. “Restaurant and bar operators have opportunities to position spirits, wine, and beer offerings as a point of differentiation and grow sales going forward.”
The unusually harsh weather conditions during the first two months of this year resulted in overall foodservice sales declining 3% to 4% nationally and 7% to 8% in weather-affected markets such as the Northeast and Mid-Atlantic states, according to Technomic analysis. As a result, projections call for drink sales in restaurants and bars to remain challenged in 2014, although Technomic Research Director Eric Schmidt sees continued growth in whiskey, craft beer, and domestic table wine.
“These adult beverage categories, driven by unique and often food-friendly flavor profiles, are really relevant to today’s consumer,” he observes. “In the hands of the right bartender and promoted properly, these products can deliver on both experience and value. Although overall adult beverage volume will be challenged this year, we expect dollar growth from the ongoing consumer shift to more expensive categories, such as high-end whiskey and craft beer.”
Give the Customers What They Want
Though the economy has started to recover, consumers are still being cautious when it comes to discretionary expenditures. That can cut two ways for the alcohol industry. On one hand a drink can be perceived as an unneeded add-on to a meal. On the other, alcohol can be perceived as an affordable luxury — something a consumer deserves because they skipped a fancy vacation or buying a new high-end TV.
By catering to the affordable indulgence markets — through products like high-end whiskey and craft beer — the industry can rebound. Selling beer, wine, and liquor in a nervous economy requires salesmanship but the major players appear to be adapting to the new market. 2014 may be another down year but ultimately the industry will rebound and will have a chance to toast its own success.