Is Trump going to lead us into nuclear war with North Korea? Is it ethical to have children when the world’s resources are already stretched thin? Will global warming and the melting ice caps flood Shanghai? Why does a drink at a cocktail bar cost 85 rmb? Wasn’t I paying 55 rmb for the same thing just yesterday? What is this damn cocktail inflation?
I need answers.
So I asked. Not about Trump or kids or that other bullshit, but about the stuff that matters: mixed alcoholic beverages. I brought my question to the owners of a well-known and very popular cocktail bar in downtown Shanghai and I got a hell of a reply: Its full profit-and-loss statement for 2016.
The numbers. How much they make, and how.
Yes. I’ve done this before. But for restaurants. Those are different. The most obvious difference is a kitchen full of perishable food and a crew of young guys to cook it. A bar doesn’t have to worry about that.
Besides wanting justification and a full, floor-scraping apology, I had some other questions. Should I give up this writing crap and open a bar? What’s the margin like when things are going well? Are costs really that high, and is my complaining really that warranted? How much does it really cost to make a drink, and I mean the real cost, the one that accounts for the ayis who clean the place, and the internet bill, and the glasses that get broken, and the special ice from that one guy, and the expensive bottle of bitters – and bitters are expensive, I learned, really expensive – and and and...
For those who have questions like me, feast on this. Download this spreadsheet and play along at home. We will call this very real place, who I promised not to name, The Cocktail Bar and these are their numbers for 2016.
What They Make
The Cocktail Bar is on a leafy street in Xuhui and it has a warm, cozy atmosphere. It opened a couple of years ago during the wave of new bar openings, and it took more than a year to find its feet. Finally, this year, it has really become a solid business, posting healthy profits in all the months it can but, the head bartender told me, Chinese holidays are a bitch, and it’d be better for them if February and October just didn’t happen.
One way to look at how much it costs to make a drink is… the actual cost. The bar holds about 70 people when it’s rocking, and in order to renovate, decorate and install the equipment (with a little savings a la Taobao), it took 800,000rmb. They held another 800,000rmb in reserve, a rainy day fund to help prop up the business in those first months – that first year, really – while they made a name for themselves. They’ve never advertised and their strategy from the first day has always been word-of-mouth. (That “PR” line on the spreadsheet is for direct public relationships, i.e., buying people drinks.) If you’re going for the glory like they chose to, reputation over marketing, you need something to float on. So altogether, 1.6 million RMB to get it up and going. Not much. About the price of dinner at, say, the “workshop” of my main man, Joel Robuchon.
After all of that, here is what they make and how:
About 15,000rmb per night on average, though of course that’s a lot higher on a Friday than a Monday. That warm atmosphere really helps during the colder months, and business peaks in November and December, as the city drinks itself into equilibrium with the depressing weather. On their best night, they might take in 35,000rmb, which, I think, is about the price of a single table at one of the Chinese mega-clubs these days.
What It Costs; The Short List:
Cost of Goods Sold
This is the short answer: What’s in your glass - the drink-drink - costs about 25% of what you are paying. Some drinks cost more. They take a hit every time someone orders an expensive whiskey like an 18-year-old Yamazaki, even at 380rmb per glass, and they do a little dance every time someone orders a vodka soda – vodka costs nothing, even the good stuff – or anything with rum – though the lime and good mint in a mojito are actually quite expensive, as are oranges (gotta have imported) and lemons (which can be half seeds), a botanical quirk of Shanghai. Beer, or at least the beer they’ve chosen, is basically a giveaway, because they pay 23rmb per bottle but can’t charge more than 55rmb without feeling like total assholes, and they want a quality house beer. So, they eat the cost. But for explanation’s sake, the head bartender described to me his Manhattan. Let’s look at that.
The ingredients in a Manhattan: whiskey, vermouth, bitters, ice and a cherry. At The Cocktail Bar, the whiskey is Rittenhouse Rye, which costs the bar about 280rmb for a 750 ml bottle; the vermouth is the fancy Cocchi Vermouth di Torino, 250rmb for a 750 ml bottle; the bitters are classic Angostura, which are as expensive as booze (or more, when you get into craft bitters), at 128rmb for a 375 ml bottle; fancy ice from the fancy ice guy who freezes water in a way that results in beautiful, large-chunk ice that becomes crystal clear, about one kuai worth; and a fresh cherry they have soaked in bourbon. Let’s call that another kuai.
So Into the Glass...
- two ounces (59ml) of rye whiskey, 22rmb
- one ounce (29 ml) of vermouth, 9.7rmb
- two dashes of bitters (2 ml), 0.7rmb
- ice, 1rmb
- bourbon-soaked cherry, 3rmb
For a grand total of… 36rmb. Um. Actually, that’s not a very good example, because The Cocktail Bar’s Manhattan is only (only!) 85rmb, meaning the cost is 42%, on the high end. But there you go. Some drinks are more expensive to make than others, but there’s a ceiling to prices. Take the bartender / owner’s word for it. And say a quiet thanks next time you see someone drinking a vodka soda or an inexpensive gin and tonic – they are subsidizing your Manhattan. Incidentally, this little pricing exercise destroys my theory about price inflation and being taken advantage of by bartenders. Also, at three ounces of booze and nothing to dilute it, that Manhattan would get me very happy, very quick.
I didn’t want to take The Cocktail Bar’s word for everything, or assume they are the perfect representative for the entire Shanghai cocktail industry, so I spoke to the owners of three similar premium cocktail or spirits bars to get a sense of how this P&L holds up. The result: Solid. They’d be happy to have one like that.
The most interesting thing I learned through talking to these guys, though, is to pay attention to the The Pour, in capital letters.
The amount of alcohol in a standard drink varies around the world – in the UK, it’s 20 ml, in Japan, 45ml, and in the US, it could be 90 ml, as in The Cocktail Bar’s Manhattan. Shanghai being such an international city, pours vary widely at cocktail bars, and no one ever asks how much booze in going into their drink, exactly. (In the same way 90% of restaurants have French fries on the menu, but when you order them, you never ask how many fries an order is.) This calculation can actually get extremely complicated but for explanation’s sake, let’s keep it simple.
If the bartender is Chinese but learned from an Italian, he might pour 45ml. If he’s English, he might pour less than half of that. One of the owners told me that he commonly gets English people into his bar, who know that at home, they can drink five gin and tonics before calling it a night. At English pours, they are taking in 100 ml of alcohol. But at his bar, where he pours 45ml, that’s 225ml, more than double the amount of alcohol in the same number of drinks. Wondering why you feel so shit the next day even though you only had three drinks?
Maybe it was the American pours.
The other interesting thing seems obvious in retrospect but may not be something most people think about, and that’s the quality of the booze a bar is using. Without getting into the issue of fakes, or bars that put inexpensive alcohol into expensive bottles, one of the reasons for Shanghai’s cocktail inflation is what you might call "quality inflation". Our cocktail bars have gotten better. Our choice of spirits is vastly different than it was ten years ago. And when those niche, expensive spirits go into our drinks, the name of the drink doesn’t necessarily change but its quality certainly does. Think about a pizza. A pizza is a pizza is a pizza, right? No. In one place, it’s industrial mozzarella and cheap tomato paste on an inexpensive crust. In another, it’s fresh mozzarella and San Marzano tomatoes on a properly risen and stretched dough. They are both called pizza. One is clearly better than the other, and in general, Shanghai is moving towards the nice Italian pizza in this metaphor.
So from both perspectives, quantity and quality, the bar owners considered The Cocktail Bar’s Manhattan to be a pretty good, even at 85rmb. It’s not always fair to ask “why has the price of a cocktail gone up” without considering that the quality of that cocktail has likely gone up as well.
This, plus rising rents, goes a long way to explaining why my 55rmb drink is now 85rmb in Shanghai.
What It Costs, The Other Stuff
You know what’s more expensive than the ingredients in your glass? The people serving it to. People, in Shanghai, are expensive.
In Shanghai, head bartenders are taking home 25-30,000rmb a month. The Cocktail Bar’s head bartender is a bit different: he willingly takes home a bit less (22,000rmb) so that there’s a higher budget for his other stuff, on the theory that he’d rather give up a little bit of personal scratch in order to keep good employees and make his life and work that much more stable. For the first two years, he was on 17,000rmb a month. He makes an excellent drink. And for most of that time, he was making less than an English teacher.
Beneath him, he’s got two bar managers, who can handle everything that he can, and they are making 10,000rmb a pop each. And then you’ve got the grunts. The well-meaning, nice people who are bar-backs or ayis or general labor. They take up the rest of the payroll, which is easiest to calculate as a fixed figure, not a % of revenue, because you don’t suddenly hire more people for the one month you are busy, or fire people for a month. Payroll at The Cocktail Bar: Just under 100,000rmb per month.
After that you’ve got the miscellaneous stuff like gas, water, electricity and repairs, and then one more big expense: rent. The Cocktail Bar was lucky. They knew a someone who knew a someone who had a space with the right license that they didn’t want to operate any more, and the landlord let it go for a song. There are families in high-rise apartments paying more than they do for rent.
If you’re paying close attention, you’ll see the rent spikes every few months. That’s the cost of a dormitory for their staff, which is a pretty common arrangement in both restaurants and bars in Shanghai. My cabal of advisers were split on the issue of The Cocktail Bar’s rent. One said it was a bit high, and should be 10%, but then immediately admitted that’s not always feasible, and he himself was paying 18%. Another said he’d be happy paying up to 20%.
Really, really nosy? Want to know exactly how much they spend on equipment, utilities and discounts? Click here for the full sheet.
The Price of Risk
One of the more intangible costs is the price of risk. More than one owner told me that they needed to add just that little bit more to prices because operating in China is risky, and you never know when the landlord is going to jack up your rent (what contract?), when a government “spot-check” is going to require some money to fix, or when your building is suddenly marked for demolition, despite that five-year lease you signed. You like the fast pace of change in Shanghai?
Good, because you’re paying for it every time you order a drink.
How Much They Profit
This is the number everyone wants to know, and, hey, look, unlike "Ristorante Italiano", this place is actually doing pretty well! Their profits aren’t huge, and they only hit these levels in the third year of business, but all told, The Cocktail Bar produced just under 900,000rmb in profit for the owners (they’ve paid off the original investment so this is real profit). That’s not making any one person rich — it gets sliced up among the investors — but it is a nice little business they have going there, with a profit margin in the 25% range, after taxes, a number most any business would love to have. Good for them! There are success stories in F&B in Shanghai, and The Cocktail Bar is a particularly sweet one because it was built by people with a passion for the business, and, lo and behold, they are being rewarded. In money.
So You Want to Open a Cocktail Bar...
So should you open a cocktail bar? The other owners were quick to point out that The Cocktail Bar is an exception, not the rule, and that the majority of new bars fail. One of the owners of a very successful place told me he breaks even seven months of the year, loses money during the holidays, and only makes a profit in March, November, and December. And though his revenue is significantly higher than The Cocktail Bar, his profits aren’t, and pretty soon, even those are going to be wiped out by the rental increase that’s written into his contract. Sure, he’ll still get a salary, but the profits will basically dry up, and he’ll have three more years to go before the lease is up. The owner of The Cocktail Bar told me, sure, go ahead, open one, but then he gave me about ten caveats.
The moral of his story? Be a landlord.
But say you are inspired, you want to provide a cocktail bar like no one has ever seen before. Even if you avoid the pitfalls and figure out what you should be doing, you’re going to be working a hell of a lot of hours, six nights a week, dealing with drunks and eating poorly, because by the time you get off work, nothing is open, and you won’t be taking home much money in return. Or so the owners say. Maybe they just don’t want more competition from you.
Nonetheless, the positive numbers, the profits, and the reputation are reasons to be happy for The Cocktail Bar.
They came. They saw. They made me a Manhattan.