Preventing Loss and
Promoting Profit Behind the
Bar
Reducing costs and recovering lost sales
Presented by:
Ian Foster
Preventing Loss and Promoting Profit Behind the Bar The bar is usually a
strong profit center in most restaurants. But most operators are leaving a lot of
money on the table. Today I am going to talk about the most common ways that
profits are squandered and how to prevent them. Some of the things I am going to
cover include
The High Shrinkage in Industry
Why Pour Cost is a poor measure of efficiency
Draught Beer
Comping vs. Overpouring
Just-in-Time Inventory
How most operators turn their $25,000 POS into a $200 cash register
1
Do you have a shrinkage
problem in your bar?
Most operators say they don’t
When we say “shrinkage” most people think of George Costanza on Seinfeld but
that’s not what we are talking about! Shrinkage refers to a bar’s losses from overpouring, mis-ringing or lost sales.
2
Yet every bar is missing 14%-28%
of their alcohol
Why?
Over-pouring
Theft
Mis-ringing
Recipe deviation
3
Industry Comparison
• Shrinkage losses under
2%
• Spend $billions trying to
keep shrinkage under
control
• Method of inventory
control compares units
sold to units used
• Average shrinkage of
21%
• Majority of owners
don’t think they have
a problem at all
• Method of inventory
control calculates
cost of goods sold as
% of overall sales
-Retail industry refers to stores such as Sears,Wal-Mart, 7-11, etc.
-The 1 1/2% shrinkage rate quoted for retail is well-established by industry
studies. According to industry sources, up to half this shrinkage is employee
related
4
Why does our industry have
such high shrinkage?
• Bartenders control both liquor AND cash
• Bartenders main source of remuneration: tips
• Operators use outdated and misleading
methods to analyze bar profitability: pour cost
5
Is this a good pour cost?
-the first step to eliminating liquor losses is to stop relying on pour cost to tell
you if you have a shrinkage problem
-here is an example from one of our clients. This client looked at his monthly
pour costs and proclaimed that they did NOT have a significant shrinkage
problem
-I think that most of us would look at a 20% cost and agree
-but this information alone doesn’t tell us enough: Pour cost only tells you
how much money you made each month. It does not tell you how much
money you should have made. The main problem with pour cost is deciding
what to compare it against.
-In this example our client knew his pour cost but not what should he
compare this cost to.
6
The optimal pour cost
-here are the same bar’s costs plotted in red but now we have also plotted
their optimal or ideal pour cost in black
-the optimal costs show the bar what their real target pour cost should be if
nothing was missing, stolen or overpoured
-here you can see that when the cost was at 21% it really should have been
18%
-you can also see that both costs jump around from month to month
INDEPENDENT of shrinkage
Also note that the beverage cost was higher in November but that there was
virtually no shrinkage. I will come back to that in a minute.
7
You cannot rely on pour cost to
tell you if you have a problem
For two reasons:
Budgeted PC is arbitrary
8
1)
Every drink has a different pour cost
5-15%
20-30%
#1 – every drink you sell has a different optimal pour cost. Even the same brand
has a different pour cost depending on what drink it is poured in. In this example,
the bar’s optimal pour costs ranged from 5% on a vodka/tonic to 21% for premium
vodkas and up to 55% on expensive champagnes…which begs the question: how
does an operator determine what pour cost they target?
9
2)
And sales ratios vary all the time
Christmas
Summer
And complicating everything is the second reason pour cost alone is inadequate:
your sales mix is going to vary continuously. A basic fact is that you cannot control
what your customers order.
For example, in the summer most bars see an increase in sales for margaritas,
vodka/tonics and other low pour cost items.
While at Christmas you sell more baileys/coffee, martinis and other high pour cost
items – including very expensive champagne at New Year’s.
It is no wonder that most bars see their pour cost go up in December – but most
don’t think about their sales mix and so spend January yelling at their bartenders.
In fact, optimal pour costs change all the time with the weather, economy, day of the
month and happy hour volume.
10
The Solution: Unit Analysis
Don’t rely on Pour Costs to tell you if you have a problem
Compare UNITS sold to UNITS used
The method used by all retailers
11
Unit analysis
Crown Royal
Coors draft
Corona bottles
Used
Sold
Short % Short
5 oz
4 oz
-1 oz
1,800 oz 1,500 oz -300 oz
40 btls
36 btls
-4 btls
-25%
-20%
-11%
This type of information has obvious benefits to the owner
-there is no guessing about the results
-it is easy to communicate to bartenders in language that they can
understand
-your managers have more meaningful information to use in managing the
bar
-the owner can effectively measure the bar’s efficiency
12
What is the cost of this
missing shot?
Brand
Used
Sold
Missing
Crown Royal
5 oz
3.75 oz
-1.25 oz
One interesting note is interpreting the cost of a shrinkage problem.
13
The cost depends on the reason for
the loss
Reason:
Bartender Drinks:
Spilled:
Theft:
Over-poured:
Cost:
75¢
75¢
$5
75¢ to $5
-Well, the cost depends on the CAUSE of the missing ounce
-if there was no opportunity for the bar to sell the extra ounce then the cost
to the owner was the 75 cents he has to pay to REPLACE the lost product
-this would be the case if the drink was spilled or if the bartender drank it
himself or if it was over-poured AND would NOT have been sold
-but if the bartender sells it and pockets the money, then the result is a lost
sale: in this case $5.00
-Over-pouring is interesting. Most people intuitively think it must be a loss at
cost but we have found this not to be true. Most over-pouring results in a
loss at retail. If you think about how most customers consume drinks, it
starts to make sense. Most of us drink until we hit a certain “comfort level.”
That will depend on the occasion of course. I know that if I have to drive
home, I will only drink until I feel the first “buzz” from the alcohol – for me
that is usually on my 3rd drink. But sometimes I feel that buzz during my 2nd
drink. I don’t think about the fact that the first two drinks were over-poured,
all I know is that I feel the buzz and I don’t order a 3rd drink.
14
Four keys to using unit analysis
#1 – Measure efficiency
“trust, but verify”
Step #1 is choosing the right way to measure the efficiency of your bar
For example, Bevinco clients monitor the difference between ideal and actual pour
costs (i.e.: the Bevinco Efficiency Rating).
15
#2 - Controls that deter shrinkage
Cash controls
• Monitor and track void, spillage and
comp reports
• Question no-sale transactions
• Blind cash drops
• Cash drawers should remain closed
between transactions
Bank tellers are not inherently more honest than bartenders. The reason why banks
have lower theft is that they have put in effective controls that deter employee
temptations.
Monitor and track void, spillage and comp reports and “walk-out” claims
Question no-sale transactions when excessive
Use blind cash drops
All transactions need to be rung up and printed on chits - before they are served
16
Drinks get rung up first
Ensure that all drinks are rung up BEFORE they are poured
This policy should be strictly enforced. It eliminates the possibility of a
bartender “forgetting” (sometimes too conveniently) to ring in a drink. This
truly is bar management 101 and not having this policy is inviting theft.
17
Eliminate “open” liquor keys
Eliminate OPEN keys
Most bars have a cash register or POS system with pre-set drink prices set
up. Most also have an OPEN LIQUOR key that the bartender can use for
items that are not pre-programmed. Obviously in the bar business there will
always be customers who order drinks that are uncommon and aren’t
programmed into the register.
Unfortunately, allowing bartenders unrestricted use of this key leaves too
much room for abuse. A bartender can easily ring up a nominal amount with
this key, say $1, and sell drinks to his friends all night at that price. To a
casual observer, it would appear that every drink was rung into the register
and all the money was collected. Or, a bartender could charge $4.50 for a
very expensive cognac. Again, if caught the bartender could simply claim
that he didn’t know what to charge for the drink and took his best guess. A
termination based on these circumstances would not be enforceable if
challenged.
18
Institute basic controls
Other controls
• Inventory counts and controls should
not be performed by staff
• Check deliveries
• No staff drinks/staff need to drink at
table, not bar
19
Write a recipe guide
Washington Apple
Ingredients
Amount
Crown Royal
1 oz
Sour apple schnapps
½ oz
Cranberry Juice
1 oz
Pour ingredients over ice in a collins glass.
One of the biggest concerns of good operators is consistency. If your
customers aren’t served a top-quality meal every time, then you run the risk
of disappointing your regular customers.
The same concerns apply to your bar. Most operators assume that their
bartenders know how to make all the drinks. However, it is a good bet that
your bartenders were originally trained in different establishments. We have
all overheard customers comment that they “like bartender X because he
pours a “good” drink.” What this really means is that your bartenders are not
pouring consistent drinks.
Writing a recipe guide is a necessity.
20
#3 - Hold managers accountable
•
•
•
•
•
Bonus more effective than straight salary
Bonus based on efficiency measure
10-minute “stop and stare”
Testing: recipes/portion-control
Coaching
Our most successful clients realize that instead of personally trying to hold each and
every bartender accountable for shrinkage, it is easier and more effective to make
that the managers job – and to hold him or her accountable for alcohol losses. Just
like almost all bartenders can pour perfectly when they want to, almost all managers
can eliminate shrinkage problems if they want to (assuming they are have access to
reports showing losses in ounces).
You pay your managers to do exactly that, manage - if they are motivated to do it.
Our clients find that there are two ways to do this. #1 By making sure your GM
knows that this is an important part of their job, mainly by asking them about any
continuing shrinkage and asking for a detailed plan to eliminate it.
#2 is even more effictive: our most successful clients change the GMs pay structure
so that their base pay is lower but with generous bonuses for hitting certain
shrinkage targets. Don’t bonus based on PC targets, which are easy to manipulate
by discouraging up-selling or cheating. Our clients set the bonus based on Bevinco
Ratings targets – for example, the GM gets an extra $100/week for hitting a 96%,
$200/week for 97%, etc.
21
#4 – Eliminate shrinkage
•
•
•
•
•
Escalating consequences
X-Reading
Beer bottle counts
Spot checks on liquor (after-hours)
Daily audits
If you are truly measuring efficiency, and your managers are doing their jobs, not
only will you spot problems immediately, but your managers will have a pretty good
idea of the root causes
22
Train your bartenders to
pour draft
Teach your bartenders how to pour draft beer correctly
Don’t assume that your bartenders know how to pour draft without spilling
half of it down the drain – they probably don’t. Invite your beer vendor to help
you train your bartenders in the correct way to pour draft with a perfect head
and no spillage.
You may also want to consider installing new high-tech draft beer fobs.
23
FOBS pay for themselves
A FOB (foam-on-beer) device is a good cost-saving device. They work by
shutting off the flow of beer BEFORE air gets into the line. This eliminates
the loss of beer from keg changes (and the convenient excuse that changing
kegs provides).
24
VS.
An easily overlooked cause of squandered profit is your regular customers – or,
more to the point, how much thought you have given to acknowledging them.
If you don’t have a policy for looking after your regulars, your bartenders probably
do – and odds are that it benefits your bartenders more than it benefits your
business.
Lets take a moment to look at Comping VS Overpouring
25
Comp regulars instead of
over-pouring
• Comping is more effective
• And cheaper
If you don’t have a clear policy for looking after your regulars, your
bartenders will look after them with the only tool at their disposal – portion
size.
Over-pouring for regulars:
-bartenders will determine who gets over-pour and it will be in their best
interests, not yours (ie: big tippers, their friends)
-impossible to manage
-taken for granted by customers
-expensive: the result is that 25% over-pours become the norm
Comping:
-cheaper: you could give away one in five drinks to everybody and still come
out ahead
-manageable because there is a record of every comp (who, why, when)
-empowers bartenders to build your business
Don’t give the bartenders a set comp limit
26
As an industry, our liquor ordering practices are 40 years behind the modern world.
Most bars have $10,000 in excess inventory – yet they still run out of something on
a busy night and have to borrow it from the bar next door. How can a bar be both
over-stocked, yet run out of stock?
27
Inefficient Ordering
• Bar Manager’s experience & intuition
• Historical Pars
• Empty Bottle > Full Bottle
• Liquor Salesman
Bar Manager’s experience and intuition In the hands of an experienced manager
guessing like this can produce surprisingly good results.
Unfortunately, it is also the most likely to lead to massive over-stocking. The
manager’s main incentive is to make sure that they don’t run out of anything. They
do not have any real incentive to order efficiently.
Historical Pars – ordering based on pars works well in theory – at least when the
pars are first determined. But calculating pars properly is time-consuming so pars
are calculated once and then only re-adjusted when the bar actually runs out of
something. Unfortunately, the unintended consequence is that the most popular
brands are out-of-stock most often, because their usage grows over time. Thus,
this method is almost guaranteed to annoy the largest number of customers.
The other problem with pars is that they are adjusted up but never down – there is
no mechanism in place to adjust down.
Empty Bottle > Full Bottle or the Bottle for Bottle Exchange. As a brand’s sales
increase, the empty bottle method guarantees that the bar will run out of it at least
once before the problem is corrected. Conversely there is no mechanism for
reducing the amount on-hand.
Liquor Salesman NEVER let your Liquor or brand rep set the order
28
Just-in-Time Inventory
Japanese Management Practice
Just-in-time ordering, a Japanese innovation, is one of the key management
insights of the past twenty-five years. Toyota made it a central part of their costcontrol strategy. And Wal-Mart has practically built their business on it.. The
objective is to keep inventory to a bare minimum while avoiding out-of-stocks
29
Just-in-time inventory
in your bar
4 Characteristics:
#1 - Calculate average and/or
peak usage
There are four important characteristics for an efficient just-in-time inventory
process. I will illustrate by explaining how we determine the weekly pars and
an order for our clients.
First, the par has to be based on the average, or the peak, usage of each
brand over the past few weeks. Our software is set up to look at each brand’s
highest usage over the past three weeks as the basis for the par.
30
Just-in-time inventory
in your bar
#2 - Builds in a “safety margin”
To that we need to add a safety margin. This “buffer” is a percentage of
usage. For example, for some brands our software adds a safety margin of
100% of the peak usage. So the bar would have to use more than twice as
much of their highest recent usage before they ran out.
31
Just-in-time inventory
in your bar
#3 - Adjusts for changing usage
patterns
Because Bevinco is always looking at the three most recent weeks, pars will
climb as usage increases and then fall if usage decreases – all automatically
and without any extra work.
32
Just-in-time inventory
in your bar
#4 - Allows for a lag time until the
order is received
If the order is placed on Wednesday but not received until Friday, the
extra two days of sales have to be factored in to the order
33
How much inventory?
•33¢ for every $1 of sales
•Turnover ratio of 35x
So how do you know if your current ordering system is effective? You can look at a
couple of key measures of ordering efficiency.
Bevinco clients who follow our order recommendations find that they can have 33
cents in inventory for every dollar of sales. You should be able to figure out your
own ratio easily with your monthly financial statements.
Another helpful measure is turnover ratio. The average bar inventory turns over 21
to 26 times per year. A review of the best run Bevinco® clients, however, shows
that 30 or 35+ turns/year is easily achievable.
Please note that if you carry a sizeable wine inventory, your ratios will be higher.
Fine wines sell much more slowly and often must be purchased in sub-optimal
quantities. We recommend that fine-dining restaurants calculate their wine turnover
separately and target a turnover of between 12x and 20x times per year.
34
What is turnover ratio?
Cost of Goods Sold during
the Past 12 Months
Current Inventory Value
= 35
35
Eliminate excess inventory
• Pour as well liquor
• Drink Specials
• Use it in the kitchen
• Sell it to your staff at cost
• Give it away – sales contest
What to do if your inventory is too high
First, don’t make the problem worse. Fix your ordering process so that it is more
efficient
Second, get rid of your “dead-stock.” For spirits the easiest way to productively sell
dead-stock is to pour it as your well for a week. For example, if you are stuck with 6
extra bottles of Bombay gin then use it in place of your well gin. It isn’t so easy to
sell obsolescent liqueurs. I would start by setting up drink specials that are
designed to move them. Use a bartending website to search for drink recipes that
call for the over-stocked brand. For example, using the “Search for Drinks” feature
on www.webtender.com, I found more than a dozen drinks made with Alize.
If the drink specials don’t work then see if your chef can use it in the kitchen. If not
then you can only conclude that you are left with pretty useless, and absolutely
dead, stock. You are better off without it. Consider selling it to your staff at below
cost or giving it away to your servers or bartenders in a sales contest.
36
Effective Use of POS
Let’s move on to our final topic: Effective Use of Your POS System and the
important role it plays in preventing loss behind the bar.
Point-of-sale technology allows operators to fine-tune their pricing to maximize
profitability. With a POS system, you can individually price each brand and each
drink to account for it’s cost and consumer demand instead of being locked into
charging $6.75 for every premium brand.
37
Dumbing down your
P.O.S. system
• “Speed keys” turn a $20,000 POS
system into a $200 register
But that power is lost if you allow the POS company to program simple speed keys
for well, call, premium, etc. In effect, such keys turn your $20,000 P.O.S. system
into a $200 cash register. You lose in two ways: Lost profits and Loss of Control
*profits are lost when your bartenders can ring up both Glenfiddich and Macallan as
super-premiums even though your customers will pay more for Macallan – indeed,
expects to pay more.
*control is lost because you cannot pinpoint individual brands using unit analysis as
we discussed earlier. Your managers can be more effective if they know that you
are missing 35% on Crown Royal than simply knowing that the calls are missing
16% overall.
38
Martini bump keys
= lost profits
The same problems exist when operators use a generic bump key to ring up
martinis. I see most bars do this. Instead of programming a key for a simple vodka
martini and a separate key for a Grey Goose martini, they have the bartenders ring
up the vodka first and then account for the extra liquor by hitting a “martini bump”
key that adds $2.50.
The result is that you make a lot less money on the Grey Goose martini. Here is an
example from one of our clients. You can see that when they sell a vodka/tonic,
they make $3.48 but when they sell a Grey Goose & tonic, they make $5.02 which
means an extra $1.54 in profit from up-selling.
But when they sell a Grey Goose martini, they only make an extra 31¢ from upselling – because they use the same $2.50 up-charge for all their martini pours.
Again, by using generic bump keys, you are dumbing down your POS. A better
strategy is to have a separate key for every brand of martini, manhattan and
margarita. So a well martini might cost $2.25 more than a vodka/tonic but a Grey
Goose martini would cost an extra $4.75.
39
One objection I have heard is that adding brand-specific keys will slow down the
bartenders. I understand this concern but we have clients doing $50,000/week in
alcohol sales without speed keys and generic martini keys and they are not slowed
down at all.
The key is how the speed screens are set up. This is one area where I think the
POS companies do a poor job. Let me show you how I would set up the screens so
that ringing up a Grey Goose martini is actually faster than using a generic bump
key.
To ring up a martini now, bartenders usually have to hit vodka on the 1st screen,
then Grey Goose on the 2nd and finally the bump key to signify a martini.
With efficient screens, we can reduce this to two steps. On this screen the
bartender would ring up Martinis…
40
…which leads to a screen listing all possible martinis. By simply hitting “Grey
Goose”, the bartender has rung up the drink in two key-strokes rather than three.
41
Dumbing down your
P.O.S. system
SPEED KEY
DOUBLE JACK
DANIELS
GREY GOOSE
MARTINI
Eliminate speed keys
(well, call, premium)
Replace generic martini keys with brand-specific martini keys
The same principles apply to generic “double” keys, “rocks” and “up”
You should program a separate key for “double jack daniels”, “double crown royal”,
“double glenfiddich”, etc.
42
Summary
•
•
•
•
•
•
•
•
High Shrinkage in Industry
Pour Costs
Unit Analysis
Controls
Draught / FOB
Comping vs. Overpouring
JIT
Dumb Down POS
43
www.bevinco.com
1-800-BEVINCO
foster@bevinco
Thank You!
44
Newsletter: sign up by sending an
e-mail to: foster@bevinco.com
45