BARS BEATING MUTUTHO TO BECOME PROFITABLE

When Mututho decided that Kenyans had had more than their fair share of the frothy stuff, he didn’t really have the best interest of the bar owners at heart. To say that revenues took a nose dive is a gross understatement. Slashing the drinking hours by half is not really good for business. That the rules have made the country better or less drunk is a debate for another day. I happened to come across statistics on “The rise of spirits against beer” and boy are they shocking.

I’ll present a case of a bar I work for as an accountant and the journey it has taken from profits, through reduced profits and losses to profitability under the new rules. This bar took a particularly hard hit when the said rules took effect. We saw revenues fall by over forty percent in one month and remain at that low level for over six months. Improvements have been realized at a time when we actually expected a further dip given that the football season is over everywhere.

As a business owner, when faced with declining profits, you have a few options: Cut costs, Increase revenues or do both. The obvious cost cut is to render some employees redundant since keeping them on the job can no longer be justified (You can be sure that many waiters and bar managers are not very happy at Mututho’s antics). The obvious solution to increase revenues is to increase prices. Any drinking Kenyan can bear me witness that beer prices have never shot up with such ferocity as they have since the bill was passed.

At the bar, we chose to implement both options several times, adjusting the parameters until an acceptable level (Break-even) could be achieved. The inflation levels experienced last year (Which I still believe was engineered) did little to solve the bar-owner’s woes. The drinkers decided that the best way to shore up their losses was to cut their drinking budgets and the bar owners cringed.

Somewhat 2011 was a dark year for many retail businesses. Retail is driven by aggregate demand and inflation has a downward pressure on aggregate demand. The brewer screams that the high barley prices, power and distribution costs must be matched by an increase in price, the bar-owner passes on the high prices to the drinker and the drinker retaliates by reducing the number of bottles he downs. Ultimately the hugest loser is the bar owner.

When the football season started last year, expectations were that demand would recover because football fans love beer. This being a sports bar expectations were very high, up until most fans (I won’t name the team they support) decided to switch to sodas, actually one bottle of soda per game (apparently this soda is called a screen saver). You can only hike the prices of soft drinks to a certain level and consumers can only take in so much soda at a time. Thus the only solution is to sell only Soda Kubwa.

Between April and May, the accounts are finally looking up. I have been racking my brain, trying to think of the cause of this recovery and several reasons have stood out. One of the reasons is something I have named: ‘Inflation muscle’ (I don’t know the economic term). I describe this as the consumer getting used to the inflation level even without a matching increase in income. This is the toughening up of the consumer by adjusting their lifestyles and allocating incomes to reach a new equilibrium. For example, petrol prices rose past the Ksh. 120 mark and we all sang ‘Hang the central bank’. The amazing bit is that the prices have remained at around that level yet nobody is screaming anymore. Along the way, we get used to the high prices: our ‘Inflation Muscle’ toughens up.

I have estimated the amount of time that it takes for Kenyans to develop an inflation muscle at around 5 months. In five months, we all forget the item that made the most news and we jump on to the next bandwagon in frenzy.  By March, the drinkers had toughened up and voila! Suddenly there was money in the wallets to buy a few more pints.

The second reason is actually the lack of football. I know that you all think that is a contradictory statement but bear with me. Well, we know that most people drink in a bar, and somewhere during the year drinks in the bar became expensive. The football fans use football as an excuse to escape from the house and if possible catch a few drinks. When the drinks become expensive in the bar, an ingenious solution emerges. Why not pay your DSTV subscription at home, buy a few spirits from D.O.D or some other duty-free joint and call your friends over during the weekend to watch the game at your place. So, what happens when the football season is over? Home becomes boring and you have to escape. The obvious escape route is the bar and suddenly sales shoot upwards.

The most powerful reason that I have identified is marketing. If you have a bar in some estate, you most likely don’t want to spend precious cash on elaborate advertising campaign on Classic 105. The best option is to marshal up drinkers to your joint by calling your friends and telling them to bring their friends to your place. Make these drinkers feel that they are part of the business and that they own the place. Simply make your bar their preferred hang-out joint. You breed a loyal following of drinkers very cheaply and with great effect. During the month of May, the owner of this bar was around and I believe that he implemented this strategy very effectively.

The good news for the bar-owners is that the strategies implemented to ensure that they remained in business during the tough periods are now contributing to high profitability with increased sales. The cost cutting reduced the fixed costs borne by the business and the increase in prices increased the gross profits per sale. This can only mean that any increase in sales results in a more than proportionate increase in net profits.

I can clearly see brighter days ahead for the alcohol business.