Can bars survive the new Chicago social prohibition driven by COVID-19?
By Eric A. Hiller
As everyone knows, our unfriendly visitor from Wuhan, the Coronavirus has caused a lot of problems for a lot of people in many countries, including Chicago. Living in Chicago, IL, we have seen a shutdown of the State that is unprecedented in most of our lifetimes. Many people are affected in many ways, the worst of which are the unfortunate victims of the virus itself. However, there are also other economically devastating occurrences, both to individuals and to businesses.
One of the most interesting measures to me is the closing of restaurants and bars. This of course, makes perfect sense, and will certainly help curtail the spread of the virus. However, in a major city like Chicago, which has a vibrant nightlife, it feels like we went from a carnival atmosphere too zombie desolation, within a week. As someone who works in cost management, I was curious what effect this would have on bars and restaurants. I especially was interested in bars, because I hypothesized that they would be far more affected than a restaurant, given that bar revenue comes so much more from drinks, which are typically not carried out from a bar or delivered.
So, I thought that maybe I could leverage my product cost management skills into bar cost management skills. I decided to do an analysis of how badly the coronavirus shutdown will affect bars here in Chicago.
Disclaimer: I have been to bars, but I have never run a bar, owned one, worked at one, and may not know anyone very well who does. (However, that rarely stops a management consultant… so I did some research, instead.)
There are actually a lot of sites that try to help people understand the costs of bars. Interestingly, most of their emphasis is on starting the bar, rather than its ongoing operational expenses. However, one can glean some good information from these articles on operational expenses as well. I looked at the following pages to do my research.
What type of bar are we running?
There are a lot of assumptions when doing this kind of analysis. Therefore, the first thing I did was visualize the type of bar we’re talking about. I used three basic assumptions:
- Our bar is in one of the many happening neighborhoods of Chicago
- Our bar is not a dive place, but not super swanky either. It’s just your average, fun place that young professionals, and maybe even families, like to come to regularly to eat, drink, watch the game, maybe even see a small live music act.
- Another big assumption that I made was that this bar was a going concern (already operating and well past the start-up cost period). That makes a big difference. Woe to the bar owner who is just opened a new bar a month before the outbreak of the virus and the subsequent shuttering of bars and restaurants to dine/drink-in patrons!
Operating expenses when times are normal
Below is a list of the expenses of running a bar that I was able to assemble by looking at the sources above. All of the numbers are on a dollar-per-month basis.
Liquor License $183
COP License $183
Caterer License $92
Patio License $73
State of IL License $31
Cost of Renovations $2000
Tax / Fees $1000
Professional Fees $1000
Office Supplies $500
Total Monthly Expenses: $69,000 / month
The reader will note that the biggest expense of running the bar, not surprisingly, is the cost of goods sold (COGS) of the alcohol and whatever food that the bar sells. Staffing is also a major expense, and then there are a litany of other costs, many of them fixed costs that are part of the overhead of the bar. I assumed our respectable and relaxed bar serves food and drink in a fun neighborhood of Chicago and adjusted the assumptions for each expense accordingly.
Bar revenue and profit
What do we get for that investment? Most sites seem to agree that the bar can make 200-400% margins on the items it sells. One would assume it makes more on the alcohol and less on the food. Running those assumptions through the analysis gives us a nice revenue and tidy profit.
Total Monthly Revenue: $119,000
Monthly Profit: $50,000
What will happen when the bar is closed to in-person patrons?
$100-120k in revenue per months sound pretty great. It may be a little bit overestimated from the top-down number quoted on the sources above. (But hey, we run a nice place OK?) Enter the virus from Wuhan. Now are bars shuttered by law. We are allowed to make orders for pickup and carry out and delivery, but people can’t sit around in our bar like they usually do making merry.
What I did in the analysis was go through each of the expenses and make an estimate of how much the expense would be reduced during the closing of the bars room for patrons. Some expenses are 100% fixed, such as our liquor and food licenses, so they will not go down at all. Some may be severely reduced, such as our cost of inventory for alcohol. If we aren’t selling any booze, we do not need to buy any. (I am ignoring inventory carrying cost and significant spoilage in this analysis). The problem is that if we are buying less, we have less revenue as well. Other expenses are reduced somewhere in-between.
The question is how much should an expense be reduced? Instead of trying to find the perfect number, I took a page out of the good modeling practices I have been learning for many years: I made a best-case scenario and worst-case scenario. For example, one would think that the alcohol sales of a bar that is closed would nearly go to 0, but maybe in a best case, there are still a few desperate boozehounds, who will pay bar prices (plus delivery charges) for their alcohol. For example, in my analysis I assumed alcohol sales were down to 10% in the best case.
Best-case new total monthly expenses: $21,000
Worst-case new total monthly expenses: $19,000
One might ask how is that the best case, if it is a higher expense? Good question. As we will see in the next section, it is the best case to have higher expenses, because it also has higher revenue.
What is the new normal of revenue and profit under social prohibition?
Although I adjusted the amount of costs and number of sales that we see in a shutdown situation, I assumed that our 200-400% margins stay the same in both scenarios. That may not be the right assumption; perhaps, the bars will start to discount food in order to keep their sales of food up, even though the alcohol has mostly run dry, so to speak. This might be very important for a bar. I.E. in this sort of situation, it seems natural that people would probably frequent full-fledged restaurants, and especially carryout places, for pick-up / delivery more than they would think of picking up their food at the bar. But for our analysis, we assume that we hold steady on margins.
Best-case new total monthly revenue: $21,500
Worst-case new total monthly revenue: $8,500
Best-case new total monthly profit: $(300)
Worst-case new total monthly revenue: $(10,000)
In the best-case scenario, there is a loss, but it is not so bad. However, in the worst-case scenario, which did not have that much less expense per month, the revenue is much less, and the bar has a meaningful loss. How can this be, given the expenses seem so close in both scenarios? Well, that is the effect of those lucrative bar margins.
Even in the best-case scenario, even though the Income Statement loss is small, there is a big loss for the owners who have gone from $50,000 of profit to nothing. Furthermore, there is a worse effect on the people that work at the bar. In the best-case scenario, I assumed that the owners could run the bar with 25% of the staff, and in the worst case scenario, 35%. (Obviously, the best case and worst case are reversed from the point of view of the employees of the bar.)
What if the owner just closed the bar for the months, getting rid of as many variable costs as possible (labor, COGS, etc.)?
Temporarily closing new total monthly expenses: $6,500
Temporarily closing new total monthly revenue: $0
Temporarily closing new total monthly revenue: $-6,500
How long can the bars survive?
How long until your favorite watering hole in Chicago folds completely and shut its doors forever, or at least until a new owner buys it? That clearly depends on the financial resources of the owners, but one indication might be how much of a financial reserve the bar has. According to the sources above, a bar should maintain between $50,000 and $100,000 of reserves for just such emergencies, such as major equipment failure, pipes bursting, rebuilding time after fire, etc. I am guessing that most bar owners never anticipated to use their reserve to deal with a pandemic that requires a closing. However, in concept, it is not so different from a bar closing for major renovations for a couple of months. In that case, the owners would have had to prepare by getting a reserve together to survive those nonproductive months. Obviously, in the case the best-case scenario, the bar could survive for quite a long time, but that assumes that the owners are not using the bar as their main source of personal income and they can personally survive on zero profit.
In the case of the worst case, losing 10,000 a month the bar could survive between six months and a year. Hopefully, that is far longer than these closures will last. The owners’ personal lives may not be able to withstand that. Also, their employees probably have a much worse situation themselves, as they cannot survive it either. Perhaps, the employees will move to other parts of the country or if possible, try to get another job. That will be difficult, given that they work in the hospitality and entertainment sector already.
It is spring, and with spring comes hope. It will be a month or two before warm temperatures, hopefully, start to affect the virus. By then we pray that the situation will be under control anyway. We also pray that no one gets sick, and those that do, recover well and expediently from a health point of view. Beyond physical health, we all should be praying for our fellow citizens that they can weather this economic crisis, let alone the loss of merriment and socialization at their favorite watering hole.