Liquor stores, also known as package stores, are retail stores that predominantly sell prepackaged alcoholic beverages, such as beer, wine, and spirits. Their profitability depends on various factors, including location, competition, business model, regulations, and more. Let’s take a closer look at the liquor store industry to determine if these businesses tend to be highly lucrative ventures.
Profitability Factors for Liquor Stores
There are several key factors that impact the profitability of liquor stores:
- Location – Stores located in high foot traffic areas like urban centers and near colleges tend to have higher sales potential. Rural locations can also do well if they are the only liquor store servicing a town.
- Competition – Areas saturated with multiple liquor stores divide up the consumer base and can lead to thinner profit margins for each location.
- Regulations – States with more restrictive alcohol distribution and sales regulations can negatively impact profitability.
- Business model – Higher margin products like craft beer and wine versus value brands results in higher per bottle profits.
- Owner experience – Knowledge of the industry and business savvy affects financial outcomes.
- Customer demographics – Stores located near affluent communities tend to see greater sales of premium brands.
- Operating costs – Ability to negotiate wholesale pricing and keep overhead costs in check improves net profits.
Average Profit Margin for Liquor Stores
According to industry statistics, a well-run liquor store with a prime location can expect to generate a profit margin of 8-15%. Stores with low sales volume or situated in highly competitive markets might see profit margins closer to 5%. Top performing stores in ideal circumstances could potentially achieve profit margins of 20% or more.
For comparison, the average profit margin for grocery stores is around 2-3%. Convenience stores typically see profit margins in the 3-4% range. The higher margins in the liquor store industry can be attributed to the more specialized inventory and knowledge required to run alcohol retail businesses successfully.
Revenue and Expenses for Liquor Stores
So what drives the profitability of liquor stores? Here is an overview of the key revenue and expense factors:
Revenue
- Alcohol sales – Main source of revenue. Varies based on store size, location, competition, etc.
- Sales of ancillary products – Chips, ice, cigars, lotto tickets provide supplemental income.
- Bottle deposits – Stores keep a portion of bottle deposits from returns.
Expenses
- Cost of goods sold – Wholesale liquor purchase costs.
- Occupancy – Rent, utilities, property tax and maintenance.
- Payroll – Employee salaries and benefits.
- Fees and licenses – Liquor license renewal fees. Credit card processing fees.
- Insurance – Property and liability insurance.
- Marketing – Advertising and promotions.
- Professional services – Accounting and legal services.
The mix of revenues and expenses for a liquor store can vary substantially based on business model, store size, number of employees, and other factors. However, the cost of goods sold typically makes up 50-60% of total expenses. Payroll, occupancy, and administrative expenses account for most of the remaining overhead.
Liquor Store Industry Sales and Profit Trends
Liquor stores experienced steady sales growth for many years. However, the market has faced some headwinds more recently. Here are some sales and profit trends in the liquor store industry:
- U.S. liquor store sales increased at a compound annual growth rate of 3.1% between 2014-2019, reaching approximately $59 billion in 2019 sales.
- 2020 sales spiked initially during pandemic pantry loading but declined slightly overall versus 2019.
- Driven by increased competition from grocery and convenience stores, 2021 liquor store sales declined around 2% versus 2020 to $57 billion.
- Declining sales and rising costs have caused liquor store profit margins to compress in recent years.
- Larger chain liquor stores are gaining share vs. smaller independent stores.
These trends indicate an industry in gradual decline in terms of number of stores and overall sales. Rising competition from grocery and other retail channels represents the biggest threat to liquor stores. Consolidation toward larger chains also gives those players increased pricing leverage with wholesalers.
Factors Contributing to Liquor Store Industry Headwinds
Why has the outlook for liquor stores worsened in recent years? There are several key factors at play:
- Increased retail competition – Many states have relaxed alcohol sales restrictions, allowing wider availability in grocery, warehouse, and convenience stores. This has reduced liquor store foot traffic.
- Higher compliance costs – Added licensing and reporting requirements have increased liquor store costs.
- Stagnant wholesale pricing – Distributors have exerted pricing power, keeping wholesale price increases below inflation.
- Premiumization trend down – Consumers have shifted from premium to value brands, hurting liquor store margins.
- Home delivery growth – Direct-to-consumer alcohol delivery services like Drizly have taken share.
These factors have made running a profitable liquor store more difficult. The industry will likely need further consolidation to remain viable for small operators going forward.
Opportunities in the Liquor Store Business
Despite recent challenges, opportunities remain for enterprising liquor store owners to earn strong profits. Some strategies include:
- Focus on craft beer, wine, and spirits – These higher margin specialty products attract enthusiasts and discourage discount shopping.
- Create engaging in-store experiences – Tastings, classes, loyalty programs, and a curated product mix can draw customers.
- Highlight convenience – Liquor stores provide speed and proximity for impulse purchases.
- Add delivery options – Partner with third-party alcohol delivery services or offer direct delivery.
- Expand to ancillary products – Carefully selected food items, bar tools, glassware and more can boost basket size.
Liquor stores that creatively adapt to evolving consumer preferences and buying behaviors are best positioned to achieve continued success and profitability.
Most Profitable Liquor Store Locations
Ideal liquor store locations are a key driver of profitability. Here are some of the most lucrative areas for liquor stores:
- Urban central business districts – High foot traffic and daytime office population create sales volume.
- Near colleges/universities – Schools generate student demand, especially for beer.
- Tourist/resort areas – Vacationers support on-premise restaurant sales and off-premise package stores.
- Affluent suburbs – Upscale consumers gravitate toward premium products.
- Near highways – Easy access for travelers and commuters makes impulse stops convenient.
In small towns, being the lone liquor store can also be quite profitable. Proximity to customers is vital. Liquor retailing remains largely a brick-and-mortar business, so convenient physical locations are a must.
Most Profitable Liquor Store Business Models
In addition to location, the overall business model strongly determines whether liquor stores thrive financially. Here are three profitable liquor store models:
Discount Liquor Megastore
Big box liquor stores featuring a full selection at rock-bottom prices can excel based on high volume and minimal overhead. Examples are Total Wine and BevMo. Deep discounts keep customers coming back despite lack of ambiance.
Specialty Wine Shop
Upscale wine shops targeting connoisseurs offer carefully curated European vintages, small production wines, and top-rated labels. Margins are high and so is customer loyalty. Staff expertise builds trust.
Craft Beer Bar
Focusing on local and hard-to-find craft brews in an engaging bar-like setting attracts beer aficionados. Limited production brews command higher prices and margins while customers enjoy the experience.
In each model, the liquor store becomes a destination for specific customer segments thanks to targeted product assortments, pricing, and atmosphere.
Liquor Store Industry Profitability Outlook
Given the trends in recent years, what is the outlook for liquor store profitability moving forward? Here are some predictions:
- Overall industry profit margins will likely remain compressed around 5-10% as competition stays high.
- Large discount chains will continue gaining share and see stronger profits than smaller players.
- Specialty stores focusing on niches like wine, craft beer or premium spirits will stay viable with good locations.
- Rural liquor stores could see improving economics as closures lead to reduced competition.
- Further consolidation toward big box and specialty models and away from conventional stores seems probable.
In summary, well-positioned liquor stores can certainly remain quite profitable, but the bar for success is rising. Owners must adapt to changing consumer preferences and up their game both in product offerings and customer experience to stay financially competitive.
Conclusion
Historically, liquor stores have enjoyed healthy profit margins of 8-15%, far exceeding most other retail sectors. However, declining sales trends, rising costs, and increased competition have recently compressed profits for many operators. Liquor stores situated in prime locations serving niche markets or value-focused shoppers can still thrive. But marginal stores are increasingly under pressure.
Looking ahead, liquor store owners need to focus more than ever before on targeted merchandising, creative experiences, and enhanced convenience to retain customers and remain financially viable. With the right strategies and execution, liquor retailing can certainly still prove a profitable enterprise. But simply relying on past approaches is becoming progressively less fruitful in today’s changing marketplace. Agility and innovation will be vital for liquor stores to sustain strong profitability in the future.
