Conversation with Michael Callahan. Part 2.
Michael talks about supplies challenges and the bar industry in Hong Kong.
The second biggest issue was supply. At the time, there was absolutely nothing here. In San Francisco, I had almost everything. You know, if I wanted to get Pisco, I had six different models from four different suppliers. If I wanted to have mezcal, there were maybe 20 different mezcals that I could choose from. In Singapore, there was not one single bottle of Mezcal or Pisco. So I couldn't make any mezcal cocktails. I couldn't make any pisco sour.
The other ingredients here were very overpriced. A bottle of Hendrix was so expensive at the time that I almost couldn't make money on it. When I moved here, it was 30 SGD for 30 ml of Diplomatico or Zacapa 23. That equates about $22 for a 30 ml pour of Zacapa 23. It's crazy. Because the price of the base ingredient was so expensive, cocktails prices were about the same.
And so we were trying to figure out how to get the cost of the ingredients down so we could get more people drinking. Not a lot of people could afford to go to cocktail bars. If you go with somebody to a cocktail bar back then and you buy two rounds, it's over a hundred dollars for just four cocktails. And it's not even the craziest ingredients. So getting the cost of the ingredients down to lower the prices of the drinks so that we could open the door for more people to come to bars was a huge challenge.
And all of these things had to be approached with a different look, a different way of sort of attacking that problem. So we came up with different ways of approaching staffing, different ways of approaching education, and more importantly, a very different way of approaching our supply for stocks.
Thankfully my business partners at the time, Paul and Spencer, were not from an F&B background, but they're from an entrepreneurial. So for them, there were product supply, the logistical, and financial problems to solve. They did some research: what would it take to get products into Singapore, what the average cost is if you buy it from the source, what the cost is for the tax and the duty, and is it makes sense for us to find a way to get it somewhere else.
We looked into it and realized, that if we could build a supply chain, we could potentially get products from the US packaged, shipped, taxed, delivered to the bar, and it would still be sometimes 30 or 40% cheaper than the wholesale price here in Singapore. We said, ‘Wow, that just shows how much margin that the suppliers are keeping, how greedy the suppliers work, and how inflated the prices are for the operators’.
All of the suppliers of Singapore were charging a very high premium, the margins were very good for them. They were basically charging the restaurants as much money as they were getting. The suppliers were getting very rich, but the restaurants and bars could barely make any money on what they're buying.
And we quietly built our own supply chain with some strategic partners on the West Coast in California. They would consolidate orders for us and we would pay for shipping three or four times a year. So every two to three months we would get a very huge shipment of bottles. And it was all of our stock for the next three months.
So when we opened 28HKS, our back bar had like 250-300 bottles, and there was nothing anyone in Singapore had seen before. All of the other bar owners, bartenders, and the guests were like, ‘Oh my God, how did you get this here?’. We had Four Roses Yellow Label and it wasn't even imported in Singapore. Our house gin was Beefeater but it was a USA ABV. So it was a higher ABV gin, which makes a more robust cocktail.
It was almost like a bar from New York all of a sudden just appeared in Singapore, completed with the hospitality and products. So we didn't want anyone else to know what we were doing to keep the competitive advantage. We would have the products delivered in a large truck in unmarked boxes late at night, and we'd have a small team of staff. And as soon as the truck arrived, we would unload the truck and get it in as fast as possible. We would have literally hundreds of bottles. So we would buy everything in bulk and then have it shipped over. Much like the old days in 180 when your shipment came once every other month or maybe twice a year, and you had to make it last.
So we were able to offer our cocktails cheaper. At the time, most people were offering cocktails for about $20 to $25. All of a sudden we started offering cocktails at $18. And it was a better spirit, more alcohol for less price. Nobody could compete with us. We absolutely and completely changed the market, because we were able to offer great drinks at a very good price. So all of a sudden younger people started coming in because they could afford it.
Then we saw that there is the next phase, right? My business partners being entrepreneurs said, ‘Hey, wait a minute, there's a really strong opportunity here.’ We had already built the supply chain, and optimized and learned how to get the products from all over the world to Singapore. We already figured out costs to pay the government, so we can legally get it into the bar, and the shipping, and the duty and all of that. So the next logical step was just to make it a bigger operation. And that's how Proof&Co was born.
So we started offering these bottles to our competitors. And a lot of people said, ‘Why would you do that? Why would you take your competitive advantage and give it to your competitors?’. And the smart answer is that eventually, somebody else would have done it. Eventually, somebody would have said, ‘Wow, these guys are doing this. Why don't we do it and start selling to the other bars?’. So we did it first.
The biggest thing about bars is that if you own a bar in the same city, sure we're friends. But ultimately you are also competitors. Like, I am trying to sell cocktails and you are trying to sell cocktails to the same people in the community, and for all intents and purposes, we are competitors. But by selling the spirits to our competitors, we turn our competitors into our customers. So the better other bars did — better Proof&Co did — better the community grew. The community grew bigger because we were making it more available to the general public, and we were making prices cheaper so people could drink more good quality drinks.
It was a beautiful positive cycle, where more bars were opening, there were more profits to be made, it was cheaper prices. More drinkers started drinking, more staff started to want to work in these bars. All of the bars started making a lot more money, and Proof&Co started making money too. Bartenders started to have opportunities and it just grew from there.
So it all started with us saying, ‘I refuse to pay that much money’, and figuring out how to get it cheaper and offering those savings on. And that's where, I think, a lot of people start to get greedy as soon as they figure out, ‘Hey, I could save a lot of money by ordering it myself and keep the prices the same as the market and make as much profit as possible.’ But we saw that that’s why the market was so small. The community was small because the prices were outside of the reach of the general drinker. By bringing the prices down, we could pass the savings on the consumer and still make our margins. But then to grow the size of the general consumer base so we could make more sales, also keeping our standard profits. It's better to make more sales with less profit than it is to make a larger profit in a very small amount of sales. Because 100 drinkers giving you $4 or $5 profit per drink is a lot better than five drinkers giving you $20 or $10. So that's the way we went and it completely changed the market.
The taxes and duty in Singapore are very high, but you don't even have to apply to bring the alcohol in, you just have to pay. As long as you have a shop and you are selling it there, you can bring in anything from anywhere. It's an open park and that's a very advantageous part about being based in Singapore. In the US we couldn't do that. They have a three-tier system that eliminates the monopoly. And that's kind of something that we had at the time. It was a bit of a monopoly. We had the cheapest prices for the best products and if we wanted to, we could sell it so cheap that no one could compete with us. And we could sell those bottles to others at a higher price.
But to be ethical, we didn't do that. 28HKS always paid the same price as everybody else in the market. 28HKS was just a customer to Proof&Co. We didn't give ourselves a competitive advantage in pricing there. We wanted to be fair, but we didn't have to. Singapore is an open market and you can do whatever you want to if it’s within the law.
But yeah, they make it very simple. You just declare it, pay your tax and duty and you can sell it at the bar. No problem. It's all online for the most part. Like I'm coming back from Tales or BCB and I want to bring some bottles back. I can bring as many as I want. I just go to duty and pay. There's a machine, an actual kiosk, and you just scan and put all the money in (or run your credit card). And you don't even have to talk to anyone. It spits out a receipt so you can show to the customs people that you paid your tax and duty and they let you go through. It's that easy.
Well, actually Hong Kong did have a scene that started at around the same time as a Singapore scene. But, I think, Hong Kong it's a different animal altogether. So, you know, 10 years ago they had Quinary with Antonio Lai. I mean, they always had Jay out there working at some pretty cool bars. Lily&Bloom was open, I think, the same year or the year after 28HKS. So there were maybe four or five cocktail bars in early 2010-11. But what happened?
Well, Hong Kong was at the point where Singapore galvanized and the community came together to try to get more and more consumers. But Hong Kong has always been more cutthroat. The bars actually just worked to survive and they had no problems stealing each other's guests and staff. But that’s the side of the beauty of Hong Kong, it's really a cutthroat business-driven city. And I've always loved that. It's known for that. It's really about business out there and everyone's hustling, always hustling. I've always enjoyed the hustle in Hong Kong.
So I got there to open Proof&Co cause we expanded company distribution from Singapore to Hong Kong, which was our second market. I moved out there to open the offices and begin consulting. It allowed us to see that there was a fractured community. And that some of the people who were trying to build the community are already there. So we were able to galvanize even further.
It was at that time that Andrew was at Stockton. We became good friends with the rest of the community and all the guys who were distributors at that time. This was probably 2013-14. We had a lot of people arriving from international cities. And they were fighting against their bosses’ desires to just make all the money and saying, ‘No, what we need to do is to come together as a community.’ And that's what we started to do.
WhatsApp chat groups were formed for bartender support. So we can help each other find products, help each other with guests who maybe have lost their phone, help each other with staff coverage if somebody was sick or needed help.
We started to have community meetings there, we would have football games and hikes together. So once that community was built, we started to do exactly what Singapore did by sending our consumers to our friend's bars. Like if I send them to one bar, they send it to the next bar. But we keep them going to craft bars, we don't allow them to go to shitty bars (cause there's a lot of really fun, shitty dive bars there). But instead of letting them get lost, we send the guests to another cocktail bar and then they send their guests to our bar.
And it helped to grow the prestige of cocktails in the community. But it was a hard journey. It definitely, definitely was. Now the scene is a lot more stabilized. I helped in the earlier years, but a lot of the Hong Kong bartenders are the ones who get credit for that. This latest generation, I think the 2015 era of bartenders in Hong Kong, knew the system was broke and they took it upon themselves to fix it. So everyone from the bartenders and bar backs to the servers, the hostesses, and the managers were working really hard together to keep the cocktail community alive and to grow it.
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