Ask the Expert Archive
Q: I am a CPA whose client is looking at buying an existing bar/nightclub with entertainment on weekends. The club has gone through two quick ownership changes and has done much better under the current owner. That owner says it is because the previous owner was doing about a 50 percent cash business and was seriously underreporting. My question is this: In general terms, is 50 percent of sales being in cash (versus credit cards) even possible for such an operation? The current owner is much more heavily weighted toward credit sales. What is a typical cash/credit transaction mix for a bar/nightclub?
A: It’s quite possible, even likely, that the cash/credit mix could be at or around the 50/50 mark — or even higher. Although many people use credit cards for dining and drinking these days, nightclubs in particular pose many unique challenges to simply opening a tab at the beginning of the night and closing it at the end:
Cover charge – In my experience, this is the most cash-intensive profit center in a club. I’d estimate that 90 percent of covers are paid at the door in cash. Because this profit center is also not directly attached to a cost center (and therefore not expressed as a “Cost of Goods” percentage on a P&L statement), it is also the easiest to under-report. If $2,000 in cash per night doesn’t show up on the books, it is kind of tough to detect unless you have access to accurate door counts.
Ancillary beverage outlets – Things like beer tubs, shot girls and patio stations are typically cash and carry, due to their nomadic nature.
Roaming guests – Especially in large dance clubs, patrons tend to gravitate toward cash so that they can access different outlets easily – this bar, that bar, hail down a cocktail waitress, etc. – as they “cruise” or move about the club. Opening a tab often means they are tethered to one bartender or bar station for all of their drinks. Dance clubs are by nature “prowl-y” places.
Policy – Many owners actually have policies or procedures that discourage the use of cards; having to use the same bartender, for example. The reasons are many. Some operators don’t like to pay the percentages on purchases to the credit card companies (versus actually MAKING a couple of bucks from each transaction on their own ATM machines). Some feel it slows service in high-volume situations. Some just like to “under report.”
— Tim Kirkland, Renegade Hospitality
A. There are so many variables. In a bar, it’s quite irregular to consistently ring-in up to 50 percent cash transactions. It is hard to imagine an on-premise business in this day and age generating so much cash legitimately. With entertainment on the weekends it sounds as if cash collected at the door in the way of a cover charge is a plausible explanation. If that's not the case, then it seems equally plausible that the previous owner(s) purposely setup their operation to generate more cash than credit cards sales. For example, remote outlets, such as beer tubs, servers walking the floor with racks of test tubes, etc., typically are cash-only transactions. The other explanations I can think of are less innocent in design and intent.
— Robert Plotkin, BarMedia
A. Most clubs are lucky to see 15 percent credit card sales, but that is being crazy generous! That's why they need consultants during sales and purchases, but in-short I would say 5 percent-10 percent credit card sales. Also the fact that he is under reporting is not the buyer's concern. He saved in taxes; now he must suffer during the sale.
— Robert Casillas, Monsoon Group
Q. Do patrons calling police on their cell phones from inside a club pose a problem for the club owner? Bouncers are for breaking up disturbances, which are bound to happen from time to time, and yet some people call the police when these things happen instead of letting the bouncers do their thing. And city officials notice incidence reports; might they alert the club or threaten to pull the business license if there are numerous calls to police from inside a club?
A. The short answer to your questions is no. I have not seen, nor have my clients seen, an increase in 911 calls made by guests who see something happen and feel the need to call police.
That said, city officials, more specifically, police officials will and do look for the number of calls for police service to alcohol licensed venues when they have a reason to. The most common reason city officials look for calls for police service statistics is when a bar or club has shown a history of trouble and is "on the radar." Some clarification is needed: If there were 10 guests in the nightclub during a fight and all 10 of the guests called 911, all 10 calls for police service would count at a single call to the address of the nightclub or a single call for police service. The 10 calls made by guests will fall under one single incident for police service.
Here is another, I think, more important point regarding police calls for service and police visits that nearly all clubs and bars really should note: How many clubs and bars keep a record of every single police visit to their venue? I mean every single police visit to their property? My informal research and survey of 25 club and bar owners has shown exactly zero out of 25. Owners and managers should remember that city officials are documenting every call for service to clubs. Owners and managers should also be documenting every visit by police and what action was taken by the officers. For example; cop sits in the bar parking lot, does nothing and just sits and watches, makes a phone call and then 40 minutes later, drives out of the parking lot. That 40 minutes must be documented by the club or bar that they had a cop on the premise and there was no action taken.
This number could be very important, and when compounded over a year it could reach more than 1,000 hours of cop out of service time and more than 500 visits to the bar or club without any police problem or other issue in a year. So, and this is the major point, when city officials call a bar or club on the carpet and say they have too many calls for police service and point to 23 calls in a year, the club can say, "Hey, wait a minute, we also have over 500 visits where no police action was taken." Dumbfounded city officials may now back up, regroup and pull their 23 calls off the table.
Bottom line, cell phone 911 calls are rare and not an issue as a group of calls.
— Robert C. Smith, CEO/President, Nightclub Security Consultants
Q: When it is time to change the concept of a venue? I am a general manager for a nightclub concept in Washington, D.C., and my owner has had a long nine-year run, but we went from being the hottest place in town with 2,500 people coming through the doors daily to 150 during the week and 300 on the weekends. I have told the owner it’s time to reinvest and change the concept, but he is still holding on. Meanwhile we lose good employees and good customers because it’s so slow. We have tried lots of promotions and different entertainment but after nine years we still get customers that say, "Well, we see nothing’s changed here in the last nine years.” How can I convince the owner that it’s time for a change and re-investment in the property? Are there “parameters” I can show him?
A: A club's lifespan depends on a couple factors, but the most important is the size of market that you are in. In a major metro city a long lifespan is about eight years max. Smaller towns/cities can allow a club to have an extended lifespan as competition is almost non-existent and patrons have no choice. People upgrade computers and cars fast nowadays, so I can only imagine how tired they are of a club that’s 8 to 12 years old!
Today's consumers are more aggressive when it comes to their nightlife choices. They want the newest and best of atmospheres within nightlife. Convincing any owner is never easy. But as a GM you are his right-hand man/woman with the most influence with his/her business. Ask your owner to drive a 12-year-old car, and when he says you’re crazy, and then tell him to go to his 12-year-old club. Ask him where he goes out to take a date; I bet it's not his club. Explain to the owner that [declining sales and traffic] numbers do not lie, and that there is a solution. Remodeling during this recession is smart, as your competition is scared to do so. With the economy as it is, consumers are seeking the best bang for their buck and new is exciting and refreshing.
Key indicators for a remodel/rebranding is the decline of business numbers (i.e., numbers of patron and sales) and staff quality. Get true feedback from local nightlife patrons and hear the answers that are obvious. Be careful though; do not allow an owner to meet you half way with a name change or a remodel! One without the other is disastrous. If you change the name and branding you will be the same pig with a new name and the clientele will feel betrayed and lied to. If you remodel and keep the same name, people will be less likely to return to see the new changes and it will be a losing uphill battle to get them in as you are trying to recover from the expenses. You must execute both, and that will bring in new staff — refreshed and energetic to claim the business's, and their, new legacy.
Also, I say, don't go down with the ship. As a GM you have a reputation; explain this to the owner and explain that you need a new ship and crew. Your career is as good as the club you work in. Sometimes it is wise to not go down with the ship. This might be the wake-up call the owner needs.
— Robert Casillas, president and founder of the Monsoon Group of Las Vegas
Q: In a single-unit Italian restaurant in a college town with 15,000 students and 15,000 locals, what percent of general dine-in sales should be generated by alcohol?
A: It depends on several factors. Which crowd are you targeting, the college students or non-college students? Is it a big menu or small menu? Do you offer wine only or a full bar with a lot of signature drinks and the ability to make almost anything? Or, is your bar limited in its spirits offerings?
Assuming a fairly robust menu, a good wine list and a full bar, with reasonable profitability, 20 percent to 25 percent adult beverage mix should be achievable.
– David Commer, president of Commer Beverage Consulting
A: There are a few factors to take into account when evaluating food to alcohol mix of sales. The ratio of lunch to dinner sales is important because most times lunch sales have a very low alcohol mix and dinner sales have a much higher mix. Another factor to investigate is the ratio of bar sales to dining room sales. If the restaurant has no bar or a very small one, the alcohol mix is probably going to be lower. It’s common for Italian restaurants to have a higher alcohol mix because they normally serve more wine, which has a higher check average then beer. I would estimate that the alcohol mix for the restaurant you've described is 12 percent to 15 percent of total dine-in sales.
– Dave Pennachatti, founder and president of Wine Guru Services LLC
Q: In the past five years, there have been fewer club disasters such as those in Rhode Island and Chicago that made headlines some years back. Is this just coincidence? Have states tightened up regulations or are club operators more vigilant?
A: It might seem that all is well and that operators have added the necessary safety measures, therefore preventing another deadly tragedy. Not true. In fact, change across the country and in our industry is moving at a snail’s pace.
There was increased enforcement around the country in the months following February 2003, when 121 people died in two nightclub incidents (see below). But overall, manpower and budget issues have prevented any local or state governments from creating a real team of officials who constantly monitor the hundreds of thousands of alcohol-serving entertainment venues nationwide on a continuing basis.
This is further compounded by the fact that if operators really want to create a safer environment, they will have to spend a fairly large amount of money on sprinklers (new or upgraded), proper exits, proper lighting, proper storage and so on.
Each year, I visit more than 200 nightclubs, bars and other liquor licensed venues around the country. The number one preventable dangerous issue I see, time after time, involves over-capacity. Operators are gambling that when they exceed capacity, they won’t have a problem that triggers a fire, a stampede or riot. This gamble could cost lives.
Finally, many in our industry have heard of the fire at West Warwick, R.I.’s The Station, which led to 100 people dying, or the stampede in Chicago’s E2 Nightclub, which killed 21 people. But many people have no idea what led to all those people perishing in February 2003. Our industry has been lucky to not have another deadly tragedy at some venue in the United States. When we do, we will again get serious — at least for a while.
– Robert C. Smith, President, Nightclub Security Consultants
Q: I have had a lot of interest from guests in alternative sweeteners in cocktails. How do they stack up? I'm especially interested in rice syrups, agave nectars and stevia, although I find stevia to be bitter.
A: Alternative sweeteners are an attractive choice for many reasons. First and foremost, consumers are looking at alternatives to refined white sugar for both health and lifestyle reasons. Providing them healthy choices in their cocktails just makes good sense. Agave nectar is vegan friendly and it’s about 90 percent fructose (as opposed to sucrose), which is very important to those watching their glycemic index. Most importantly, in my view, is that it tastes great and brings another layer of flavor to the party.
Rice and barley syrups are gaining in popularity and are already in a liquid form (like agave nectar) so they are easily integrated into your favorite cocktails.
Stevia, extracted from a South American herb, is gaining attention as a natural sweetener. However, there have been some health concerns regarding stevia, so many are waiting to see what further research reveals. Last but not least, don’t underestimate the allure of organic products. Spirits companies are scrambling to produce organic products; adding processed ingredients to these spirits would negate their perceived value.
– Sean Ludford, Director, BevX.com