Inventory management and its consequences have been a disaster for the human race. The restaurant industry is saturated with point of sale software. It is filled to the brim with accounting apps. Its cup overfloweth with outdated Oracle stopgaps. We have more ledger systems and greater granularity in our reporting than ever before -yet the problem persists.
Inventory continues to go missing
Shrinkage is so prevalent in the restaurant industry that the vast majority have resigned themselves to defeatism. Owners will often write the problem off -
“That’s just the cost of doing business!”
“You have to spend money to make money.”
“We shouldn’t step over dollars to pick up pennies!”
In my experience the number of bars with a successful handle on shrinkage is less than 2%. The managers of these bars all employ managed inventory control systems and structured training programs - these are the best cases. In the worst cases managers will simply ignore the problem altogether.
In this piece we will break down the concept of shrinkage and examine its many causes. In a follow up we will discuss actual solutions.
What is Shrinkage?
Shrinkage refers to the difference between expected inventory and actual inventory. After a specific time period of sales, we count the product, if (really when) we find the count to be short, we jokingly suggest the inventory has ‘shrunk’.
The concept seems simple, but I will reinforce with a material example as it is an odd and specific piece of jargon.
Gary begins his shift with exactly 100 bottles of Budweiser beer. It is the only beer, and indeed the only product he is selling that night.
Gary works his shift, selling the beers at a price of $5 per bottle through the entire night.
Gary finishes his shift and begins his closedown procedure - he cleans the bar, closes down the register, counts the inventory and the money.
Gary’s count returns that he has 0 bottles of Budweiser left. He is ecstatic, he must have sold them all! However, when he counts ‘the take’, he finds that he only has $250 in revenue. Gary was expecting $500 in revenue. Where did the missing beer go?
In this example Gary has suffered 50% shrinkage, and will likely receive a browbeating from his make-believe manager in the morning. If this example seems ridiculous to you, it is because I laid it out clearly and with a single SKU. The truth is that most bars suffer from rates of shrinkage as high as 50% at any one time. The losses are great - estimated at billions of dollars per year in lost revenues. But solving shrinkage is hard work, and if you have ever managed a restaurant you will know that time is in short supply. With hundreds of ever-evolving recipes, thousands of unique ingredients in their inventory, and an extreme rate of staff turnover, human managers barely have time to analyse the problem, let alone fix it.
How does Shrinkage occur?
For this piece we’re going to focus on liquid inventory. Food items add a level of complexity (added measurement types, greater perishability) we can explore at another time.
Stolen by staff (during shift)
Employees can, and often do, drink during their shift. If this practice is permissible it should be managed and accounted for. This does not contribute to shrinkage. If the practice is not permitted employees might drink the product and not account for it. This practice of “getting high on the bar’s supply” contributes to shrinkage.
Stolen by staff (outside of shift)
Bartenders can outright take bottles of alcohol or beer home after their shift. This is forgiveable if they replace it the next day to correct the count. If they don’t replace the product it is stealing and is generally a fireable offense.
Stolen by customers
Especially at loud bars or nightclubs, bolder customers will have the gall to reach behind the bar and grab any alcohol that isn’t tied down. Although rare, it happens more than one might think and the correct response is to have security escort the customer off the premises.
Broken bottles
Employees handle thousands of bottles every shift, every day, for the entire year. They are bound to drop a bottle and break it at least once. When they eventually do, the appropriate response is to make a note of the breakage. If they sweep it under the rug, this contributes to shrinkage.
Walkouts (when written off)
Walkouts are a general term given to customer orders that are taken, served, and then abandoned. Walkouts occur often - as we are dealing with inebriated people. Walkouts exist as a liability until they are either collected upon (made whole), or they are written off. Writing them off condemns the product as shrinkage.
Perishability - Overprepping
Most liquid inventory is functionally non-perishable. Even Bailey’s, a cream liqueur, can sit open on a shelf and remain completely servable. Fresh fruit juices are not shelf stable. They should be prepped according to an accurate expectation of need, or a par. Overprepping will lead to perished items - turning into waste and ending up in the books as shrinkage.
Perishability - Underserving
Non-alcoholic, fruit-based, and carbonated items are the liquids most susceptible to perishability. Unsealing a bottle or can begins the process of oxidation, decarbonation, and overall decline in quality. Bartenders open new containers of wine, beer, soda, and juice daily. If they fail to serve the full amount within the timeframe of perishability, the remainder of the ingredient will cease to be servable. This contributes to shrinkage.
Giving away free (unaccounted for) drinks:
The optimal number of free drinks is not zero. Loyal customers deserve to be rewarded for their patronage - however the reward should be managed. My preferred method is to ‘comp’ the drink as a marketing expense. Complimentary cocktails can return goodwill for your business, but it should be costed out and compared to the equivalent spend on advertising in other forms.
Bartenders forgetting to ring up cocktails:
Bartenders are busy. An effective bartender is thinking ten steps ahead at all times. Usually (and correctly in my view) they are prioritising customer service. So they may hold off on entering drinks in the POS in favour of serving one more drink. This can lead to bartenders undercharging their customers, and thus contribute to shrinkage.
Bartenders making a cocktail with the wrong recipe:
Bartenders, due to a lack of training, a lack of liquor, or even a lack of recipe, can use the wrong ingredients to make a cocktail. If the inventory actually used to make a cocktail differ from the ingredients expected to be used, this delta will contribute to shrinkage.
Bartenders serving a different SKU to the one they rang up:
This is a very common occurrence for many reasons we will get into in the next piece. Bartenders will ring up a ‘Single Stolichnaya’, but serve a ‘Single Grey Goose’ instead, or vice versa. Sometimes it is an honest mistake, and at other times it is intentional. In both instances the practice contributes to shrinkage.
Bartenders measuring incorrectly:
In my experience this is the most common cause of shrinkage, and not necessarily for the reasons you might think. Owners and management will blame bartenders for giving too much/too little, but in most cases those same watchdogs would not be able to measure the correct amount of alcohol. Bartenders around the world overpour and underpour daily. Every single time they ‘mismeasure’ the alcohol in a cocktail they are further contributing to shrinkage.
Bartenders making the wrong drink and giving it away:
Bartenders make the wrong drink with varying levels of frequency. What they do next determines the severity of the consequences. From best to worst:
The bartender makes a wrong drink, and finds a customer that will buy it. This contributes to sales, and does not contribute to shrinkage.
The bartender makes the wrong drink, and promptly throws it away. They make note of the mistake. This does not contribute to shrinkage.
The bartender makes the wrong drink, then throws it away without making note of the mistake. This contributes to shrinkage.
The bartender makes the wrong drink, then gives it to a customer at the bar as to ‘avoid waste’. This contributes to shrinkage, and decreases sales. A patron can only drink so much and this is one less beverage they will order.
The bartender makes the wrong drink, then drinks it without paying for it. This contributes to shrinkage, decreases sales, and results in decreased productivity for that bartender for the remainder of the shift.
Bartenders selling drinks at unapplicable discounts:
Most POS’s have discounts available for holidays, happy hours, and special events. Managers very rarely remember to remove or limit them. Bartenders will locate these discounted ‘buttons’ without fail, and be serving ‘green beers’ on a Monday afternoon without a St.Patrick’s day in sight. This contributes to shrinkage (though on the revenue side) and is often more difficult to detect.
Bartenders bringing in their own product to sell:
This is an extreme form of theft in both its sophistication and premeditation, but I have seen it on a few occasions. Bartenders might bring in their own bottle of liquor, and proceed to pour/sell from that bottle, pocketing the revenue. There will be an appearance of zero shrinkage, but you will suffer in lost (stolen) revenue, equivalent to shrinkage. This practice, as impressive as it may be, is unforgiveable and is a fireable offense.
Bartenders cutting product:
This practice is similar to the previous offense, but with worse consequences. Bartenders can serve drinks, pocket the revenues, and then avoid detection by ‘filling up’ the bottles with water from the tap. The average customer might not be able to discern anything less than a 20% cut, but they will feel something is off and internally register a negative experience. Shrinkage is difficult to calculate here, as it is equal to a proportion of the dilution on the revenue side. The entire bottle must be written off regardless of the numbers, which can only be calculated with some forensic camera work. Any customer goodwill lost is incalculable and likely of much greater value. ‘Cutting’ is a fireable offense and is a crime punishable by law in most countries.
Bartender substituting product:
I have seen very few cases of bartenders substituting product, and in every case it was under the direction of management or ownership. This occurs when someone fills up a more expensive bottle of alcohol with less expensive alcohol. Usually Grey Goose, Belvedere, or Patron with a corresponding bottom tier vodka or tequila. I will not work with clients who engage in this practice. It is damaging to the entire industry, is a crime punishable by law in most countries, and will result in the restaurant being shut down if/when they are caught.
There are more ways to suffer shrinkage, that are even less detectable. They are so rare however that listing them here might result in more loss as an infohazard than it would prevent.
This list of causes is sufficiently exhaustive, and exhausting to compile so I will stop here. A whitepill on this issue is that shrinkage can be beaten by plugging these holes.
Working with dozens of clients on inventory management has helped us distill our process into five steps. We are able to guarantee 0% shrinkage with 99% confidence. We do this by applying a walled garden approach to the problem. We will break this process down in the next part to this series.