Shrinking Shrinkage: Bar Management and Ordering Dynamics
Lost product, known popularly as "shrinkage," can be a huge drag on profits for any bar or restaurant. Industry average shrinkage rates hover around 25% according to Beverage Metrics and Stock-Taker. Theft is also a big factor: the National Restaurant Association reports that 75% of shrinkage comes from sticky fingers (and not the good, hands-in-the-maraschino-cherries kind of sticky fingers).
Many establishments try to respond to shrinkage by using inventory control systems. That's only half the battle, however. Taking a hard look at your ordering processes can be even more effective. Here are a couple quick tips that will help you make smarter purchasing decisions, shrink your shrinkage, and generate better profits.
Watch those Quantity Discounts
Managers are always looking for ways to reduce their cost-per-ounce. Quantity discounts are a great way to do that - and really, who can resist a good deal? However, before you sign on for that distributor's quantity discount, be sure to run the numbers. When you factor in shrinkage. you might see your savings evaporate like a distiller's Angel's Share.
Let's say a case of vodka normally costs $200. Your distributor comes to you with quantity discount offering 10% off each case if you purchase two or more. You really only need one case, but that 10% discount is too tempting. You end up buying two cases for $360 (2 x $200 per case – 2 x $20 discount per case). Now, instead of spending $200, you spent an additional $160 and got twice as much product.
But then think of that 25% shrinkage. If your bar is like most, $40 (25% x $160) of the additional product you just bought will be lost. The loss is equal to the total discount you received. Shrinkage just eliminated your savings. You also have to devote extra space and extra time to move the additional product. It's not looking like such a good deal now, is it?
Sitting Inventory Can Make You a Sitting Duck
When shrinkage threatens to eat your Quantity Discounts, how can you increase profitability? The key is to reduce sitting inventory.
Let's say you have $40,000 in inventory and you sell around $10,000 of product each week. That means you have four weeks' worth of sitting inventory on hand. It's nice to know that you're aptly prepared for an unexpected rush or a delivery delay, but sitting inventory also means opportunity for shrinkage. Consider reducing that inventory to $30,000. You will not only gain $10,000 back in your pocket, but you will also reduce your shrinkage by $2,500 (25% x $10,000). After all, the less product you have on hand the less you lose, and therefore the greater your profits.
When you only order product that you absolutely need, you take a hacksaw to your sitting inventory levels. In doing so, you also increase your bar's efficiency, reduce your shrinkage losses, and - the most important part - you make your bar more profitable.
You can never completely insulate yourself from spilled drinks, unauthorized "friends and family" discounts, or the occasional wayward staff member, but by keeping a close eye on your ordering processes and streamlining your inventory, you can take some of your shrinkage right out of the equation.
Rory Crawford is the co-founder and CEO of Bevspot, in Boston, a food and beverage program management software that helps restaurant owners and managers take control of their entire operation - from the bar to kitchen - on any device by taking inventory, tracking orders, and providing sales data instantly backed up to the cloud and accessible anywhere.