The Economics of Running A Liquor Store

When Moishe Mater isn’t next to the wine he loves, he loves the wine he’s next to. This kind of passion is exactly what’s needed to leave a life of recurring paychecks and turn to face an arduous, entrepreneur path complete with razor-thin profit margins and grim statistics.

We know most small businesses fail. We know most people will not become Gary Vaynerchuk, the serial entrepreneur who turned his family’s liquor store into a $6 million business (as of 2011). We know that liquor stores—along with specialty-foods stores and grocery stores—are among the least profitable small businesses, according to a 2015 MarketWatch article titled, If you want to make money, don’t open a liquor store.

But if you have the kind of passion Mayer has, then consider opening up your own twist on The Wine Cave, which turned Mayer’s dream into a reality more than four years ago. While abstract dreams rarely show us the minute details vital to opening and running a successful business—especially in competitive cities like New York—Mayer’s picked up major business acumen along that way that he’s been kind enough to share with us:

1. The digitally-aware, modern consumer is smarter than ever before

Before customers get to your doorsteps, you can bet they’ve already done their research with customer review sites and product ratings. Shopping is no longer something that happens in the linear flow, meaning the customer is involved every step of the way.

“People are way more educated,” said Mayer. “We have the Internet. We have blogs. You can’t fool people.”

He adds: “Back then, people didn’t know about wineries. Now people check on ratings. People check on deals. People check on how the wineries are doing.”

If retailers are going to impress the demands of the wiser and financially savvier consumer, they’re going to have to reach a level of mastery in their field. To stand apart from other liquor stores on the block, Mayer points to his more than a decade of experience in the alcoholic beverage industry. He worked in wineries since the age of 17 before hosting tastings for companies for several years.

“I have a lot of people come especially to me because they know I understand a little how the palate works,” said Mayer. And the store’s Yelp reviews prove that if you’re looking for suggestions on what to pair with your next dinner or simply a taste of the next exotic spirit, Mayer knows how to pass the taste test.

“If someone comes into my store and they ask me for a wine for the first time, I’ll ask them if they put sugar in their coffee,” explained Mayer. “If they put sugar in their coffee, I know that they like sweeter wines so I will give them California wine. But if they don’t, I will give them a French wine. They’re more serious drinkers. They can drink black coffee.”

But it’s not just knowledge about your product that you should know. Smart entrepreneurs are also aware of all the other factors that affect the financial health of their business. For instance, know your neighborhood. Who are the people you’re serving? Before signing a lease, consider contacting your local chamber of commerce to get a better view of your target market. Will you be serving college students or conservative suburbanites? This will greatly affect the way you do business.

2. Stocking up is going to cost you

Sure, inventory costs don’t even begin to cover buying or leasing a location, licensing fees, or the standard costs of building a business, but in the liquor store industry, overbearing stocking costs will kill your business if you’re not prepared.

For instance, The Wine Shop is “stocked from top to bottom with booze, wine, champagne, sparking wine, reds, whites, pinots, malbecs and anything and everything in between,” wrote one Yelper. Skimming through the reviews, Mayer’s liquor store is also lauded for having a wide selection of bourbon—a smart business move as brown spirits continue its rapid growth among American consumers. But this kind of inventory—over 3,000 products—costs Mayer millions.

“In order to succeed in the liquor industry, you have to have a lot of money,” said Mayer. “In order to keep up with the big stores, you have to have the top deals. So you have to have millions of dollars in inventory and that’s why a lot of liquor stores don’t make any money.”

Justin Holman writes about the overbearing inventory costs on his blog, stating that “distributors hold all the power.” He writes:

“As a retail liquor store owner I am only allowed to purchase inventory from a licensed distributor. Seems reasonable to keep tabs on who’s moving liquor around the state. But, here’s the catch. Every licensed distributor has a complete monopoly on every product they sell. So, any self-respecting liquor store should have various sizes of Jack Daniels on the shelf, right? I think I’ll call around and see who has the best deal on a case of 750 ml bottles of Jack, compare prices/terms and place the order, right? Wrong. If you want to buy Jack Daniels or any other product, whether it’s a brand of beer, wine or spirits, you have your choice of exactly one distributor who carries that product. So, negotiating price isn’t an option.”

This kind of business model means the bigger stores have an advantage since they’re able to afford larger bulk deals. So is there a way small businesses can get any kind of discount? An article in the Small Business Chronicle suggests small businesses get enough capital to enable them to get that “sizable discount” as it’ll widen your profit margins in the long run. Or study your market’s buying habits to buy smarter. For instance, examine your receipts and inventory. What are you selling more of? Consider purchasing those products in bulk while running special offers on your slower selling products to more quickly move your stock. You can also run special deals or host sample tastings of the slower selling stock to cultivate interest.

Don’t forget—if you’re going to open a business in a metropolitan city, like New York, you’re always going to run over budget—especially if you have to get a liquor license, as Gabe Schulman, founding partner of the Lower East Side bar Beverly’s, told us a few months ago.

3. Don’t risk losing your business over licensing

Nobody’s dreams of opening a small business include a long trail of application permits, but unfortunately in the real world, that’s how business works. And obtaining those licenses requires a lot of research, time, and money. An article in NJ.com from December 2009 states that a liquor license in Cherry Hill, New Jersey costs as much as $1.5 million. To add to the licensing headache, every city, county, and state has a different set of rules and laws, so if you don’t want to navigate it yourself, the best bet is to hire someone to do it for you. Find out what you’ll need from the Alcohol and Tobacco Trade and Tax Bureau (TTB), the entity responsible for enforcing laws “regulating alcohol production, importation, and wholesale businesses; tobacco manufacturing and importing businesses; and alcohol labeling and advertising” and licenses at the state and local level.

If you’re able to overcome the above entrepreneurial hurdles and find that your passion for owning a liquor store still exists, Mayer has one last piece of advice: Don’t forget—you’re still not the boss. The customer is the boss.

“If [your customers] walk in and they’re not happy… [then] there are no employees, there are no stores,” he reminds all aspiring entrepreneurs. In other words, customer service really is everything.

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