“Quick Summary” If you’re planning to open your liquor store, the first thought that comes to mind will be, “How much profit margin will I earn from a liquor store?” The answer to this question depends on whether you’re just starting fresh or expanding your existing business.
Whatever is your reason, the answer is not as simple as it seems. This blog will take you through all the different aspects that influence the profit margins for the liquor stores and give you an estimate of what kind of profits you can expect to make from each type of business. So let’s get started.
Assess Your Expenses Before Kick-Starting Your Business
No matter how big or small a business is, such as a liquor store, they have two types of expenses to meet: One-time expenses and recurring expenses. If you’re looking to start and run a successful liquor store,it’s crucial to understand the beneficial aspects involved.
You must weigh these expenses against the product prices you set and the profit margins you wish to earn from each sale. Before you decide to set the price that earns you reasonable profits, you’ll need to study how your competitors manage their expenses and profit margins.
Your expenses will include inventory and supplies, utility bills, rent or building maintenance costs, governmental taxes, and fees to obtain permits for operating your business.
At last, you need to consider that you’ll also need to pay an income tax on profits from your liquor store. Many variables help decide what price can be charged to the customers and how much profit you can afford.
Once your assessment completes, you are ready to calculate the cost per unit.
Calculate the Cost Per Unit
The ‘Cost Per Unit or Unit Cost’ is the total expense related to procurement, storage, and sale of a single unit of a particular product. Unit cost is equal to the cost of goods sold. The cost per unit considers all fixed and variable costs of a particular product or class of products.
Let’s take a hypothetical example.
Ideally, a liquor store needs close to 20,000 units to keep its shelves stocked.
Assuming your costs are $5 per unit and you need 20,000 units to run your business yearly. You will have spent $100,000. If you sell all your stock at an average price of $8 each, you will earn a Net Profit of $60,000 annually, a Net Profit Margin of 37.50%, and a Profit Percentage of 60.00%.
Total Purchase (expense) Price: $5 X 20,000 units = $100,000
Total Sell (revenue) Price: $8 X 20,000 units = $160,000
Net Profit: $60,000 ($160,000 - $100,000)
Net Profit Margin: 37.50% ({Total Revenue - Total Expense} / Total Revenue X 100)
Profit Percentage: 60.00% ({Total Revenue - Total Expense} / Total Expense X 100)
Liquor Business Profit Margin - An Approach
The liquor business profit margin differs from store to store. Not only does your location influence profit margins, but also what you have on stock. If you go for higher profit margins, consider carrying more expensive products and being in a more upscale neighborhood than competitors. However, you may not be able to take on too much inventory if you’re looking for higher-end brands and varieties than other stores.
Your liquor store profit margin will typically be between 20% and 30%. These profit margins are in line with averages from other retail businesses. If you’re looking to open a beer or wine store, those businesses have about 40% average net profit.
Location is an important variable when considering your liquor store profit margin. The country of origin and state and local taxes applied are also significant factors that add to the profit percentage of the products you sell. If you carry only local craft beers or niche wines from certain countries, your prices will be higher than what others charge for mass-produced alcohol.
Businesses That Sell Alcohol
Besides dedicated liquor stores, many grocery stores, convenience stores, and gas stations also sell alcohol. Such stores may not be concerned about huge profit margins from alcohol sales as alcohol is not their primary product. They maintain a limited stock of alcohol only to satisfy their customers.
Restaurants and bars have an advantage over normal liquor stores. They don't bill you for the entire bottle or 12-pack of beer but consider “pour cost” while serving you in proportions of your choice. Their location, ambiance, display, and service add to the price of the alcohol served. As a result, bars and restaurants command higher profits than a liquor store's business profit margin. They might offer you complimentary snacks, soft drinks, and ice cubes, but all these ultimately add to the price of the alcohol.
So a liquor store would have lower profit margins than a bar and restaurant, whereas higher margins than a grocery store, gas station, or convenience store that sells alcohol.
Varieties of Alcohol Sold
As most people know, beer, wine, and hard liquor are generally priced at different rates. Premium wines generally see higher profit margins because they are more expensive.
Like any retail store, you’ll see some control over your prices. These price controls fall into three price points—wholesale, standard retail, or premium. State laws generally dictate the price controls on liquor. A certain amount of markup is allowed per bottle sold at retail shops in most states. For example, California wine stores can only mark up $1.76 per bottle over wholesale costs.
State laws may impose other regulations to ensure that sales tax is collected and paid on time. Some states don’t allow sellers to participate in gift card programs because they don’t want these stores evading alcohol control laws. There are also differences in how state laws can regulate minimum pricing.
Vendor Density Within Your Market
The primary factor you must consider is your business’s location. Some locations may be more profitable than others. For example, if there are a lot of liquor stores nearby, it might be difficult for you to stand on par with your competitors. Therefore, it makes sense to look for an area with enough room for growth but limited competition.
It is better to be located in an area that isn’t very dense and has fewer competing businesses nearby.
Encash On Your USP
People get attracted to something unique. Check out your neighborhood beer and wine stores and list their activities besides selling liquor. Organizing a wine tasting event at a few residential locations will pay you in the long run.
Either use your skills or hire some talent to create tasty co*cktail combinations for the residents. There is no looking back if you can delight the residents with your co*cktail samples. You will soon see many of them flocking to your liquor shop. This is one of the ways to win over the competition.
You can associate with premium brands and start stocking their products. If you have the right resources and your state permits, you can offer home delivery of premium alcohol. Shortlist a few customers who would be ready to pay extra for such a service. This service will be your pathway to building trust for your liquor brand.
Conclusion
You can employ multiple ways, including utilizing a liquor store POS system, to determine how much profit margin you will earn from a liquor store. It all depends on how well you understand your market and discover ways to manage your competition. You will have to plan your things right. You may execute proven strategies that yield desired results. Keeping your costs low will allow you to earn better profits despite the prevalent price controls and competition.
