While bar inventory can be a very effective tool to boost profits, it requires you to use your data to make adjustments to your processes that will reduce shrinkage, lower your liquor cost and maximize the dollars you’re capturing from bar sales. But we’ve also found that you’re more likely to maximize your profitability when you implement policies in conjunction with your inventory efforts that help you optimize the performance of your team.
At Bar-i, the primary goal of our inventory services is to help you run a more profitable bar. We’ve seen how about 150 bars across 30 states perform. These bars run the gamut, from low end neighborhood dive bars to some of the most high-end restaurants in Denver. They also include bars of varying sales volumes, from roughly $25,000 per month to high volume establishments doing over $100,000 in sales per week. This variety has helped us debunk many common myths and identify certain underlying commonalities regarding what drives optimal bar performance, regardless of the type of establishment.
Separating Myth from Reality Regarding Factors Impacting a Bar’s Performance
We found that while there’s some merit to the following myths, neither actually hold true as a hard rule:
Myth: High end bars have higher standards for their food and kitchen, which may translate into better performance on bar inventory.
Reality: While you certainly see some high end bars implement rigorous standards throughout every aspect of their operations, some of these establishments don’t place the same emphasis on bar inventory performance as they do on maintaining a top flight kitchen and exceptional cuisine.
Myth: Smaller or simpler bars have an easier inventory task, which leads to higher performance.
Reality: Complexity of bar operations can create certain challenges associated with executing the inventory process, but these are easily overcome if the bar is highly organized and diligent about following their procedures consistently each inventory cycle.
Instead, we’ve found that that there are two common factors that consistently determine how well a bar performs, regardless of its size, concept, complexity or business model:
- The quality of your managers
- The level of importance placed on bar inventory
Inventory-Based Incentives Can Improve Your Managers’ Performance
While there’s certainly variability in the work ethic, integrity and leadership displayed by different people tasked with managing a bar, it’s possible to harness their innate skills to improve their performance – and the performance of your bar. Ultimately, no one is going to care about your business as much as you do, even when you have the best managers who are truly committed to doing a great job. That being said, you can get your staff to care more by providing incentives that resonate with them.
We’ve found that the most effective incentives are ones that specifically focus on improving your managers’ performance on tasks directly related to the goals you’re trying to achieve. If your goal is to improve your bar’s performance and profitability, one of the most effective ways to do this is to provide your managers with inventory-based incentives.
Several of our bars have followed our recommendations and implemented inventory-based incentives with their managers. When bar owners incentivized their managers by sharing the upside of improved profits, it had a profound effect on their inventory results. Let’s look at a real-life example from one of our clients to demonstrate the power of using effective inventory-based incentives with your managers.
Inventory-Based Manager Incentives: A Real-Life Example
The following graph from our new bar inventory software illustrates the power of inventory-based manager incentives. This Loss and Accountability Timeline graph shows a particular bar’s accountability score over 10 consecutive weekly inventory cycles. The accountability score indicates what percentage of your products poured during the inventory period were actually sold. The purpose of this graph is to help you link your bar’s overall performance with the amount of money you’re missing from products that aren’t being sold.
The black line at the top of the graph represents the scores for each inventory cycle. The percentage listed refers to the amount of product used that was actually sold. For example, on the January 16 inventory audit, 87.9% of the products poured that week were actually rung into the POS and sold to customers. This means that 12.1% of the products poured weren’t accounted for in sales.
The bars beneath the score show you how many dollars were missing at wholesale cost. The missing dollars are color coded by category (draft beer, bottled beer, liquor, wine and miscellaneous) to provide additional granularity regarding the specific performance of each type of product. On the January 16 entry, the 12.1% of products that weren’t sold equated to a wholesale loss of almost $600. Based on the graph, the largest loss was associated with liquor products.
The next week (January 23), the accountability score dropped to 85.9%, which means they were missing a little more product than the previous week. This is reflected in a higher wholesale loss that was a little over $800 for the week.
If you look at the graph, you’ll see an imaginary demarcation line between the February 13 and February 20 entries. Everything to the left of this imaginary line has an average accountability score of 86.56%, while the average score rose to 95.1% to the right of this line. What happened to cause this bar’s performance to rise by approximately 8.5% on average each week?
Impact of Implementing Inventory-Based Incentives to Address Struggling Performance
After the February 13 inventory audit, we held one of our regular check-in meetings with this client’s management team. This is a business that runs 13 different bars, so these meetings are intended to provide solutions that can be implemented across every location. We recommended that they begin incentivizing their managers so that their monthly bonuses were partially based on their Bar-i weekly accountability scores. According to these incentives, when managers hit set percentage numbers with their accountability scores, it would trigger a bonus that allowed them to earn more money.
When this bar started incentivizing their managers through inventory-based bonuses, it had a profound effect on their overall performance results:
- The average accountability score rose from 85.56% to 95.1%
- Weekly wholesale loss dropped from approximately $800 to approximately $400
This impact was experienced immediately. During the first week of the new incentive program, their accountability score jumped from 87.4% to 94% (a 6.6% improvement in one week!). You can see this effect held steady for all subsequent inventory cycles, resulting in a significant impact in profitability.
Impact of This Inventory-Based Manager Incentive Over a Year
What can we expect the overall impact of this new incentive program to have on this bar’s performance over an entire year?
Based on the consistent results achieved over the first month plus of the program, this bar is saving roughly $400 a week at wholesale cost. This equates to a $20,000 savings at wholesale cost over an entire year. However, wholesale cost doesn’t paint the entire picture of the savings this bar is achieving.
In order evaluate the real cost of this missing product on the bar’s overall profits, we need to look at the retail loss associated with this missing product. This is due to the fact that when product goes missing, it impacts your profitability on a much greater level than the wholesale loss.
When you sell a product, you typically charge about five times the amount you paid for it at wholesale. But in real life, you will almost never capture the full retail dollars for all of your missing product. There are a variety of factors why you may sell drinks below full retail value, and each of these factors will impact your true retail loss.
Based on the specific factor responsible for the missing product, the actual retail loss will fall somewhere between the wholesale cost and the five times greater cost that would’ve been achieved had the product been sold at full retail value. Therefore, your actual average retail loss will depend on the exact combination of reasons why you’re experiencing missing product.
The best approach to estimate your retail loss is to err on the conservative side. For this reason, we typically estimate retail loss at twice the value of wholesale loss. Therefore, when calculating the savings this bar can expect to achieve over a full year, we need to double the $20,000 wholesale loss savings.
By boosting their sales through these inventory-based manager incentives, this bar can conservatively estimate that their new program will result in an increase in $40,000 in profits over a full year. In an industry where profit margins are typically razor thin, this improvement will significantly impact the overall success of your bar.
To learn more about how Bar-i’s inventory services can help you streamline your processes and maximize profits, please contact us today to schedule a free consultation. We serve clients nationwide from our offices in Denver, Colorado.