Finance: Happy loss?

Colin Marsters warns that far from boosting profits, licensees are heavily subsidising happy hours.

Happy hours have long been a traditional carrot used by licensees to lure in customers during the quiet hours or the mean months of the new year. But this year that tempting two-for-one offer or cut-price promotion will be taking something of a battering.

In spite of sensational headlines accusing the government of encouraging binge-drinking, it has, in fact, pledged to get tough on the issue. "Responsible drinking" is the soundbite it uses and licensees have been asked for a voluntary commitment to being "socially responsible". That means anything from asking to see ID to not selling alcohol at exaggeratedly low prices - the tenet of the happy hour.

But this may be a blessing in disguise for you. The happy hour is not the money-spinner it appears to be - in fact, it is probably costing you dearly.

You might think that anything that brings in extra business has got to be a winner, but what exactly does a happy hour cost you? Surely the calculations are easy - you supply drinks at half price and get half your usual profit. And even half of what you'd normally make is money in the till when you most need it, right?

Cost deductions​

In fact, the happy hour can be the fastest way not only to miss out on that expected profit but to lose money as well.

Take an example. You normally sell a draught beer at, say, £1.90 a pint. After deducting VAT and the cost, you make a gross profit of 74p on that pint. For your happy hour you decide to drop your price to 95p a pint. But after VAT and cost deductions, not only will you be left with no profit - you will actually be 7p out of pocket.

On figures like these, no matter how much extra beer you shift during your happy hour, you will lose money. In fact, the more you sell, the more you lose.

Perhaps you feel you can justify this if customers stay on and consume food and drink at normal prices - but how many customers popping in for an early-evening happy hour on their way home from work stay until closing time? Even if they do, the impact of the happy hour on your gross profit (GP) percentage should make you think twice.

Let's take it a step further. You might decide to offer a half-price promotion on your whisky, for instance. You will still make a profit but you need to be aware that it will have a serious effect on your overall GP.

Look at the figures. You normally sell a shot of whisky for, say, £1.20. Deduct VAT to give a sales value of £1.02. The cost is 33p, so the gross profit is 69p and the gross margin 68 per cent.

But for your half-price promotion you offer a shot of whisky for 60p. Deduct VAT to give a sales value of 51p. The cost remains the same at 33p, though, so your gross profit is only 18p and your gross margin has plummeted to just 35 per cent.

Compensate for loss in profit​

Even 35 per cent is not bad when customers are thin on the ground, you might say. But the additional volume of whisky you would need to sell to compensate for the loss in cash profit is a staggering 283 per cent!

A "double for the price of a single" offer also leaves you with a gross margin of 35 per cent but it represents a better deal for you because the additional volume you would have to sell to compensate for the loss in cash profit is only 92 per cent. It is still a challenge, but one you might feel is worth accepting.

The Department of Health proposals suggest that licensees' commitment to responsible drinking is only voluntary at this stage. But if licensees don't take the message on board, they may be forced to do so sooner or later.

And if that argument doesn't convince you, let your own profits do the talking. Happy hours may have the customer smiling in the short term but they do little to promote the kind of trade that puts money in your till.

The only way to approach price promotions is with an iron grip on your margins and a realistic view of how every penny off the price disproportionately slashes your cash profits. Stay in control - it's the only way to keep a smile on your face.

• Colin Marsters is a founder of the Innprofit Company. It produces the Innmate Profit Pack gross profit ready-reckoner for licensees. For further information go to
  www.innmate.co.uk.

Figure it out​