In the bar industry, the term shrinkage refers to the use of product or inventory without a matching sale. Many bars experience a much higher level of shrinkage than they realize, and this can significantly reduce your profitability. For this reason, it’s critical to use a sophisticated inventory system that can identify which products are missing, allowing you to correct the issue.
How Does Bar Inventory Shrinkage Occur?
There are three types of shrinkage:
- Drink is poured, but there is no sale – In this situation, the entire drink becomes inventory shrinkage. This results in a significant reduction in profits. Not only are you losing the cost of the product, but also the cost of the sale. While the missing drink might only cost you $1 in product, the missing sale cost you $5.
- Drink is overpoured – In this situation, the amount of overpour becomes shrinkage. For example, if you pour a 2 oz. drink when it should only be a 1.5 oz. pour, the extra .5 oz. of alcohol is shrinkage. If this was a $6 drink, by pouring an extra third of a serving, you lose $2 in revenue.
- Pour a call (or premium) drink, but ring it in as a well drink – In this situation, the difference in cost between the well and call (or premium) drink is the shrinkage. You’re actually losing money in two ways when this occurs: the difference in cost between the products as well as the difference in sale price of these drinks.
What Isn’t Considered Shrinkage?
There are certain items which are simply part of the cost of doing business and shouldn’t be considered inventory shrinkage. These include:
- Broken glasses containing a full drink
- The wrong drink is poured by accident or due to miscommunication
- A customer didn’t like the drink and asked for something else
While you should expect these things to occur on occasion, it’s still important to have a process in place to track and record these types of product usage in your system. This will allow you to measure how often it’s happening. If it appears to be occurring too often, you can address it with your staff to make sure they are being more careful when they pour drinks.
How Does Shrinkage Impact My Business?
Over time, these individual missed drinks, overpours or improperly rung in drinks add up to significant lost profit. Let’s consider an example.
If a bar does $100,000 in monthly sales and has a 20% liquor cost, it spends $20,000 per month on product. If this bar experiences 15% inventory shrinkage, which is industry standard, it is missing $3,000 of product each month. This equates to losing 3% of overall monthly bar sales to shrinkage.
However, this figure doesn’t reflect the actual cost to your bar. The actual cost of this inventory shrinkage is your retail loss. In general, retail loss tends to be about five times higher than the cost of missing product due to the markup when drinks are sold to customers.
While the hard cost to your bar is $3,000 based on what you paid for the missing product, the actual cost to your bottom line is $15,000. That is a significant amount of profits to squander each month. Over a full year, that will result in a retail loss of $180,000.
What Gets Measured Gets Managed
By accurately measuring your shrinkage, you can take the steps necessary to correct the problem. The best way to measure your shrinkage is to use a sophisticated inventory system that precisely compares what is used vs. what is sold. Not only will this tell you how much you’re missing, but it will allow you to identify specific products that are most significantly experiencing shrinkage.
When you use the pro version of Bar-i’s inventory software, you’ll receive a detailed report each week identifying precisely how much you are missing for every product you serve. We’ll also provide you with recommendations of actions that should be taken to address the issue. This has enabled us to help our clients reduce their liquor cost by 3% on average, which will significantly improve your profitability.
If you’d like to learn more about how Bar-i can streamline your operations and help you maximize profits, please contact us today to schedule a free consultation. We serve bars and restaurants nationwide from our offices in Denver, Colorado.