The Economics of Renting Hookahs - A Basic Cash Flow Analysis
Every hookah lounge owner understands the concept of buying hookah tobacco in bulk in order to break it up and sell it as single servings for a profit. But how much money is stashed in that single tub? We hear questions all the time; "How much should I charge? How much can I make? How much profit can I make?" Welcome to our class of Hookah-Nomics.
Shisha Tobacco Costs, Price and Return on Investment
Check out this revenue
- 1000 grams per tub
- 15-20 grams per serving
- That comes out to 57 servings at 17.5 grams per bowl and allows for some lost shisha spillage.
- These days, hookah lounges are charging anywhere from $15-$25 per hookah bowl.
57 x $20 = $1140 of revenue from a single 1000 gram tub.
Now lets back out some costs:
- $0.50 for coals
- $0.05 for foil
- $0.10 Mouth Tips
- $1.00 for premium shisha (Starbuzz, Fumari, Nirvana or Social Smoke)
$1.65 X 57 Bowls = $94.05 total cost for all bowls served from that kilo of tobacco.
Let's Calculate the Gross Profits
$1140.00 Revenue per 1000 gram tub
$94.05 Material Costs per 1000 gram tub
$1045.95 in gross profit per 1000 gram tub of shisha tobacco, and that is using a premium brand priced around $50 per kilogram.
What other products are giving you a 20:1 return or better?
What about tobacco taxes?
Let's take a look at tobacco taxes. We will use our native Texas as an example because they are some of the highest taxes in the nation.
Even when you back out tobacco taxes as high as Texas ($43 per 1000g) it's still a return of $1002.95 per 1000 gram tub! Texas retailers and lounges pay almost $43 per 1000 gram tub. That breaks down to $0.75 per bowl.
If you had to pay $93 per kilogram like we do in Texas, you still make an 11:1 return on your investment.
How to Estimate Your Hookah Profits, Revenue - (Costs + Overhead)
Now that we have numbers to work with in terms of revenue and gross profit, let's see if we can put a basic calculation together. Here is a fictional scenario that you can use to calculate the numbers for your business.
Employee Labor: $4500 ($1500 per month per employee)
Utilities and Insurance: $1000
Business Loan: $500
Owner Distributions: $5000 (Hey, we want to get paid for running this hookah business don't we????)
In this scenario, The owner need to generate $13700 per month in sales to pay the bills and put $5000 in his pocket.
So how many hookahs do I need to serve?
$14,000.00 (Target revenue)
$1000 Revenue per kilo
14 Kilos of hookah tobacco
14 Kilos X 57 Bowls per kilo =798 hookahs per month
If you are open 30 days a month, you need to average 27 hookahs per night.
What about all my other revenue sources like beverages?
Great question! We are already accounting for the cost of the hookah tobacco in our shisha ROI. Hookah upgrades, drinks, food and other retail sales will cover the cost of goods sold and they only add extra profit to the bottom line at the end of the month. If you can average $5 in drinks, food and/or upgrades per hookah rental, that will another $2000 - $3000 of profit to your lounge, maybe more depending on your costs and the product mix, using the above model. Now we are making real money!
What if I am not getting that much profit?
Here are the 3 most common profit killers:
- Lack of Complimentary Sales - Every hookah rental should be paired with drinks. You should also have upgrades available for your hookahs, such as fruit heads or ice. These high margin upsells will add significant profit to your monthly financials. SOLUTION - Set up combo pricing, just like a value meal at your favorite burger joint. Offer a single hookah price, hookah and drinks combo, and/or hookah, drinks and premium upgrades as a package deal that customers can easily understand and get the best "value" even if it's a higher dollar amount. Everyone loves a "good deal." Here is an example of a menu that encourages combos and upsells.
- Waste - Spilling a few grams of shisha with every bowl load will add up quickly in the long run. Make sure your team understands that every shred of shisha is valuable and not to carelessly waste shisha while loading bowls. SOLUTION - We have many customers that scrape all the extra shisha into a "House Blend" flavor, that is a mix of all the scraps. You can resell the left overs as a premium mix and no other lounge can copy your "recipe."
- Overpacking - Train your employees to use a fluff pack method. Gently sprinkle the shisha in the bowl to prevent overloading. This will aslo give your customers a smoother smoke and more flavor. The loose pack prevents the top layer from burning before the bottom gets cooked. SOLUTION - Some lounges use a postage scale to measure out uniform tobacco amounts. Give your staff a range like 17-20 grams and after a while, they will be able to measure the right amount just by looking at it.
- Too many coal refills - Refill a coal 1 time, maybe twice for customers. Do not let them sit there all night on 1 bowl. This is a business not a free all-night hang out! SOLUTION - Offer customers a refill bowl (perhaps at a discount price), or politely bounce them out the door. My favorite way is to "Check the coals" during which you smash through the foil and say "Yep, it was dead." Show them the burnt ashy top and take the hookah away.