Most bars use more alcohol than they sell. This issue, commonly referred to as inventory shrinkage, is one of the biggest challenges bars face in maximizing their profitability. There are a variety of potential causes of this shrinkage, making it a fairly complex problem to address.
Common causes include:
- Free pouring – Often, bartenders don’t precisely measure out every drink using a jigger. Instead, they typically count in their heads to arrive at the proper quantity of liquor to use when making a drink.
- Typical waste – Some waste is inherent in the nature of the business. For example, draft beer always has a certain amount of natural waste that is unavoidable (some beer is always left at the bottom of the keg, and poorly performing draft beer systems may result in excess foaming). Other times, waste is more preventable, such as when sloppy pouring techniques result in overpouring.
- Incentivization – In general, bartenders will try to please a customer, as this often helps improve the tips they receive. This can lead to heavy pours or in some instances, giving away free drinks.
Is Your Bar at Risk for Higher Levels of Lost Product?
While some of this lost product is unintentional, such as with natural waste or sloppy pouring, other instances are rather deliberate. There are a variety of reasons why your bartenders may deliberately overpour or give away free drinks. When this occurs, you’re likely to experience higher levels of shrinkage, and this can significantly eat into your profit margin.
There are a variety of reasons why your bartenders may deliberately give away more product than you would consider acceptable. Some of the most common risk factors for higher product loss include:
- Bar service vs. tableside service
- Familiarity
- Lack of in-person oversight
- External factors
- Culture
Bar Service vs. Tableside Service
This is by far the biggest risk factor for an increase in missing product. When drinks are served at the bar, the person making the drink and charging the customer is the same person who serves the drink. They have a greater ability (and incentive) to overpour or potentially give the customer a free drink since this will often boost their tips.
When a drink is served tableside, there is a built-in check and balance system. The server rings in the drink, the bartender makes it according to the standard recipe, and the server delivers the drink to the table. As a result, the bartender doesn’t have the ability to benefit financially from pouring a heavy drink for tableside service. This significantly reduces the likelihood of overpouring, and it essentially eliminates the ability to give a way a drink since all tableside orders must be rung in before they are poured.
Familiarity
Familiarity is a common risk factor leading to higher product loss at local neighborhood bars where there are a lot of regulars. This phenomenon creates a greater level of familiarity between the bartender and the customers. When the bartender develops an ongoing rapport with customers, it increases the likelihood that these regulars may get a heavy pour or an occasional free drink.
This familiarity doesn’t exist at a live music venue or other places with one-off events. It also doesn’t occur at bars which don’t have regulars or establishments that experience high levels of staff turnover. These situations have a lower risk that the bartender will deliberately try to take care of a customer with a generous pour or a free drink. Instead, missing alcohol is usually due to accidental issues such as sloppy pouring or natural waste.
Lack of In-Person Oversight
Greater oversight of bartenders will typically reduce the ability to deliberately give away alcohol by overpouring or not charging customers. For example, establishments which have one bartender and an owner who is constantly on site will present a challenging environment for the bartender to be able to get away with giving away alcohol. On the other hand, establishments which have multiple bars, numerous bartenders moving around and more minimal oversight from owners and managers may create conditions that are more ideally suited to overpouring and giving away free drinks.
External Factors
Even when bar owners and managers run a tight ship and do everything possible to minimize lost product, external factors may exist which will diminish the effectiveness of their efforts. One obvious example impacting the bar industry at the moment is the COVID-19 pandemic.
The pandemic may have caused some bartenders to give away more alcohol than they did prior to COVID. Many bars have experienced lower sales volume during the pandemic – at first due to capacity restrictions and then due to some customers simply not feeling comfortable returning to public gatherings. If bartenders have been making less money during the pandemic, pouring heavy drinks or giving away a few free cocktails provides them with a way to boost tips and recoup some of that lost income.
Culture
Finally, the culture at your bar can contribute to the likelihood that bartenders will give away more alcohol. In general, bars that cultivate a tight-knit relationship between management and staff will be less likely to have bartenders who deliberately give away alcohol. In these environments, the bartenders often will feel more personally invested in doing right by the establishment.
However, bars which don’t cultivate a personal relationship between staff and management/owners may create a culture where the staff feels less responsibility to the organization. In this situation, bartenders may be more likely to give away alcohol.
How Much Product Is Missing at a Typical Bar?
Over the last 10 years, we’ve performed more than 20,000 inventory audits in 30 states. When we start working with new bars, we typically see that 10-20% of what is poured is actually missing. Based on this range, we’ll use the midpoint of this 10-20% figure as our starting point. In other words, the average bar is typically only accounting for 85% of product poured before implementing effective inventory controls (the other 15% of product is missing due to the varied reasons discussed above).
What Is this Missing Product Costing Your Bar?
If you sold 100 Jack Daniels drinks during the last inventory period, you’ll see that the Jack Daniels POS button was pressed 100 times when you run your sales report as part of your inventory audit. If you have a 1.5 oz. pouring assumption for standard cocktails, you should find that 150 oz. of Jack Daniels were used when you perform your inventory count (100 drinks x 1.5 oz. = 150 oz. of Jack Daniels).
If these drinks were slightly overpoured (by 20%), then you’ll find that 180 oz. of Jack Daniels were poured instead of the 150 oz. required to make those 100 cocktails. What did those missing 30 oz. of Jack Daniels cost your bar?
- 1L bottle of Jack Daniels costs you approximately $25
- This bottle contains 33.82 oz. of liquor
- Therefore, you are essentially missing a full 1L bottle in our example where 30 extra ounces were used than sold
- This equates to roughly $25 wholesale loss for Jack Daniels during this particular inventory period
While this wholesale loss figure represents the amount of money you spent to purchase product that was missing, it doesn’t exactly tell you the entire story. In reality, you lost significantly more than $25 in profits due to this missing bottle of Jack Daniels.
What’s the Real Cost of this Wholesale Loss to Your Business?
A different way to look at this question is to evaluate what the retail loss would be for the $25 wholesale loss that occurred when an entire bottle of Jack Daniels is missing. For the purposes of our example, we’re going to assume you have a 20% liquor cost for Jack Daniels. This 20% figure is right in the middle of the range we typically see with our clients’ liquor cost (13-30%).
If you have a 20% liquor cost for a product, it means that every time you buy the product, you typically sell it for five times the amount you paid for it. In this scenario, you’d multiply the $25 of missing Jack Daniels by 5 to arrive at a retail loss of $125.
Problem with Calculating Retail Loss Strictly based on Liquor Cost
There is a slight problem with the $125 retail loss figure we arrived at above. It’s a meaningful figure in the sense that it tells you the amount of money you’d have made if you sold all of this missing product at full retail value, but in real life you will almost never capture full retail dollars for all of your missing product.
Often, there are other factors that cause drinks to be sold below full retail value, including:
- Happy hour discounts and other drink specials
- Comps
- Spills
- Overpoured drinks
In real life, the amount of money this missing product costs you actually depends on the reason it’s missing:
- Spilled (1:1 ratio) – If your bartender spills the drink while making it or the customer spills it while grabbing it off the bar, the bartender will remake the drink at no additional charge. In most instances, bartenders don’t account for these spilled drinks when ringing up the cocktail served to the customer (they just ring up the one drink that was actually served).
In this instance, it just costs you to replace the Jack Daniels that was spilled. Based on the figures being used for our example, the cost of this missing drink to you is approximately 75 cents. If the entire missing bottle of Jack Daniels was due to spills that weren’t accounted for when the drinks were rung in, then the real cost of this missing product to your bottom line is the $25 spent to purchase the bottle. In other words, your wholesale loss would also be the real cost of this missing product.
- Forgot (5:1 ratio) – It’s really busy behind the bar and your bartenders are cranking out drinks as fast as they can to get all of your customers served in a timely manner. In order to get drinks out faster, your bartenders aren’t ringing them in as they go, but instead they just made a huge wave of drinks and then rang them in after getting through this busy wave. When they finally rang these drinks in, your bartenders accidentally forgot to ring in all the drinks poured. Instead, they only rang in 4 out of the 5 Jack Daniels cocktails that were poured.
In this situation, the customer would’ve paid full price for the drink that wasn’t rung in. In real life, this missing drink costs you the full 5 times the wholesale cost because at a 20% liquor cost, you’re charging 5 times more for the drink than you spent purchasing the product at wholesale.
Forgetting to ring in a drink or giving it away for free and not including it on your comp tab represents the top end of your retail loss. In these situations, you are always losing the full retail value of the drink since a customer would normally have paid full price for the drink that was ordered.
Overpoured (between a 1:1 and 5:1 ratio) – Sometimes drinks won’t be poured to the exact measurements specified by your pouring assumptions. Instead of a 1.5 oz. pour, your bartender may serve a 1.7 oz. or 1.8 oz. pour. This can be due to a lack of pouring practice, a desire to pour strong drinks that will garner better tips, or simply a byproduct of bartenders having to crank through lots of drink orders quickly during a busy rush.
In certain situations, this won’t affect your bar sales. If you have a customer that is only coming in for 1 or 2 drinks, a heavy pour won’t usually impact the number of drinks they order. But if someone orders 3 or 4 drinks and is monitoring their buzz, those heavy pours may cause the customer to decide against ordering that last drink since they’re already starting to feel drunk. In this scenario, you may lose out on the sale of an extra drink due to cocktails being poured heavier than they should be.
In real life, you will almost always experience a mix of these different factors when you are missing product. Therefore, your retail loss will actually be somewhere in the middle of the 1:1 and 5:1 ratios discussed above. The actual number will depend on the exact mix of reasons why you are experiencing missing product.
Don’t Ever Assume a Max Retail Loss
It’s never a good idea to assume your retail loss is the maximum value based on your liquor cost. You need to ask yourself who is buying all of that missing booze at full price? Some of these missing ounces of Jack Daniels would certainly have been purchased, but in most cases some of this missing product would have been spilled, overpoured, sold at a happy hour discount, or lost in some other way that would’ve prevented you from capturing the full retail price of the drink.
Therefore, it’s hard to determine precisely how much of that missing product would actually have been purchased at full price had everything been poured and rung in properly.
Real Cost of Inventory Shrinkage Falls Somewhere Between Wholesale and Retail Loss
In real life, retail loss is an exaggerated figure, while wholesale loss is an undervalued figure. The real cost of this shrinkage falls somewhere in between these two figures.
We typically take a conservative approach and estimate that the real cost of shrinkage is approximately twice as much as your wholesale loss. In our example, if you’re missing $25 of Jack Daniels, it probably equates to at least a $50 retail loss to your business.
Keep in mind that this is a conservative estimate. In general, your retail loss will be at least this high, and potentially even a little higher. A good ballpark range would be to estimate that the real cost of inventory shrinkage is 2-3 times as much as your wholesale loss. We prefer to err on the cautious side and stick to the lower end of this range when we make our estimates.
That being said, don’t underestimate the fact that in real life, this inventory shrinkage is actually costing you at least double the wholesale loss figure, and often more than double.
How will Reducing Inventory Shrinkage Benefit Your Profit Margin?
In real life, when you address this problem and reduce your inventory shrinkage, you can expect to see a 3-4% decrease in your liquor cost. In general, once our clients get their shrinkage problem under control, they typically reduce their liquor cost roughly 3-4 full percentage points.
You experience this reduction in liquor cost because you’re getting the same sales from the customers in your bar, but you’re using less product to get those sales. In time, most of our clients also find that their sales will increase (less overpouring often equates to more sales). This will compound with the lowered liquor cost to significantly increase your profits.
How Can You Recapture These Losses?
Most bars don’t leverage their bar inventory efforts for maximum benefit. Instead, they only focus on Level 2 inventory, which involves performing inventory to calculate liquor cost by product category (draft beer, bottled beer, liquor and wine). When you only calculate liquor cost by category, you’re blending together products with different price points. This makes it extremely challenging to truly understand how specific products are performing.
For example, well vodka may have a higher profit margin with a liquor cost in the low teens, while a high-end vodka product will typically have a liquor cost closer to 30%. When you get a combined liquor cost for all of your products in a specific category, it’s much harder to see what’s missing because you’re not getting an accurate measure of the cost associated with each specific product.
The solution to this problem is to focus on Level 3 inventory. You need to use an advanced inventory system that allows you to accurately measure the difference between how much is sold vs. how much is poured for every product at your bar (this is the essence of Level 3 inventory). You need to actively manage these variances on a product by product basis to identify which specific products are going missing at unacceptable levels.
There are a variety of inventory systems available to help you achieve Level 3 inventory. The specific inventory solution you choose isn’t important. As long as you choose a solution that focuses on Level 3 inventory, you’ll be able to effectively manage your shrinkage and recapture these lost profits.
The information (and accompanying knowledge) provided by Level 3 inventory will help you make the adjustments to your business necessary to reduce missing product. When you know what’s missing, you often also know why it’s missing. Let’s look at a few different examples to illustrate how knowing what’s missing can also help you to better understand the potential cause of the problem:
- Shots – If you’re missing a significant amount of Jägermeister, Fireball, or any other drink almost exclusively served as a shot, it’s virtually impossible for the missing product to be caused by overpouring. In these instances, the shot glass provides the precise pour size. Therefore, these missing drinks are most likely being given away.
- Wines by the glass – Wine is typically a category of product that performs with less shrinkage. Missing wine tends to be concentrated in products which are served by the glass and indicates either give-aways or poor portioning. The trend of using large wine glasses makes it easier than ever to overpour wine.
- Well vodka – If bartenders are going to give away your product, they typically aren’t going to choose the least expensive products. Therefore, it’s most likely a sign that your bartenders aren’t accurately measuring out your established pour size and may benefit from pouring practice.
How Much Money Can Be Saved from Implementing Effective Inventory Controls?
Let’s look at a couple of different examples to demonstrate the significant savings you can achieve from upgrading to an advanced inventory system that precisely compares what was poured vs. sold for every product at your bar:
- Bar # 1 – Bar in a college town with approximately $20,000 in weekly bar sales and a liquor cost of 21% (this equates to $218,000 per year in alcohol purchases)
- Bar # 2 – High end restaurant with approximately $70,000 in weekly bar sales and a liquor cost of 22% (this equates to $800,000 per year in alcohol purchases)
Both bars are extremely high performing with average losses of just 2%. Therefore, the difference between their level of performance and the average bar operating at 15% losses (discussed above) is 13%. If we estimate losses at 2 times the value of wholesale loss (also discussed above), we see that both of these bars have experienced significant annual savings by leveraging the benefits of Level 3 inventory:
- Bar # 1: 13% of $218,000 is $28,340 per year wholesale loss savings – doubling this figure means this bar is saving $56,680 per year
- Bar # 2: 13% of $800,000 is $104,000 per year in wholesale loss savings – doubling this figure means the bar is saving $208,000 per year
What Is the ROI for Each of These Bars?
Bar # 1 spends $120/week with us for their inventory services. This equates to $6,240 spent annually on bar inventory. They perform weekly inventory counts with a hybrid system that pairs them with a dedicated account manager who performs all calculations and provides recommendations on how to improve the performance of missing products.
- Bar # 1 spent $6,240 to save $56,680 in recaptured profits over the course of a year – this equates to a 908% ROI
Bar # 2 spends $180/week with us for their inventory services. This equates to $9,360 spent annually on bar inventory. They perform weekly counts with a hybrid system that pairs them with a dedicated account manager who performs all calculations and provides recommendations on how to improve the performance of missing products.
- Bar # 2 spent $9,360 to save $208,000 in recaptured profits over the course of a year – this equates to 2,222% ROI
For two very high performing bars, the range is 900-2,200% ROI, which is a staggeringly high number and certainly worth the investment, especially in an industry that typically runs on very low margins.
Some Additional Perspective on These ROI Calculations
Keep in mind that we based these ROI calculations on an average score of 85% of all products being accounted for in sales prior to implementing our inventory system. It’s possible that these bars, which perform at a very high level, started out at a level greater than 85% prior to
implementing these inventory controls. If this were the case, it would mean that our projected ROI figures may be a little inflated. That being said, even if the ROI was cut in half, it would still be very significant and represent a worthwhile investment.
In addition, both of these bars use our hybrid inventory system option which is associated with higher weekly costs due to the assistance of an account manager. Therefore, these bars were paying $480/month and $720/month respectively compared to the ~$200 monthly cost associated with many self-service inventory system options. By using the self-service option, the annual ROI for these bars would jump to 2,360% for Bar # 1 and 8,667% for Bar # 2. Using a self-service system may impact the effectiveness of execution, which may lower the ROI slightly, but you would still be able to achieve a very significant ROI in this situation as well.
When you’re working with such high ROIs, there is plenty of wiggle room regarding the specific results your bar achieves. Even if your bar isn’t able to reduce your missing product to levels as low as 2%, you’ll still be able to experience an excellent ROI.
There are very few actions you can take at your bar that will yield the same level of ROI in terms of your profitability. Moreover, it’s highly likely that you’ll achieve a similar ROI to our examples because the losses associated with missing product are typical, the savings achieved are typical, and this makes these results predictable.
If you’re looking to improve the profitability of your bar, cutting down on missing product provides one of the biggest opportunities available to achieve your goals. Using an advanced inventory system that precisely compares what was poured vs. sold for every product at your bar will enable you to unlock significant annual savings with a relatively small expenditure to achieve these returns.
