So you’ve finally completed the build-out, the permits and licenses, the employee hiring and inventory purchases, and you’re ready to open your bar and restaurant.
And then someone asks you how you plan to manage “loss prevention”. If your next thoughts include any of “what is loss prevention and why do I care?”, this post is for you.
What is Loss Prevention?
In the restaurant and bar context, “loss prevention” typically means minimizing how much of your inventory is “lost” before it can be sold or used. Some common examples:
Your bartender grabs a bottle of high-end scotch as he heads across town to his next party.
Your bartender enjoys some shots and free drinks with his friends – at your expense.
One of your staff leaves the back delivery door open and an enterprising citizen helps himself to an unguarded case of wine.
A kitchen staff member forgets to return food to the refrigerator at night and the food is spoiled by morning.
At VideoData Insights, where we focus on Loss Prevention, we use a slightly broader definition:
Loss Prevention means preventing events that increase your costs or decrease your revenue.
For example, consider the following:
One of your staff members thinks it would be hilarious to take a photo of himself standing in the lettuce bin and then post it on social media. He does, and your location becomes nationally famous – for all the wrong reasons (Yes, this actually happened – see link).
A female staff member is sexually assaulted by a customer. Management fails to take the issue seriously and the staff member, feeling aggrieved, quits, posts a negative review of the location on social media and perhaps files suit. (For an example of what, in our view, is the proper way for the staff member and management to handle this inappropriate contact from a customer, see this link from this news report; please note that in this case, management completely supported the employee).
A bartender gives a patron a high-end drink, but then rings up a beer – ten times a night. (You can download one of our sample reports here which show this situation based on actual data from an actual bar]
Local authorities decide to crack down on underage drinking – just at the time your door guards get a bit too relaxed about checking ID’s; they find several examples of underage drinkers in the bar, resulting in fines, legal costs and the personal involvement of management and ownership. See for example, this article from the Baltimore Sun describing a crackdown on underage drinking in Harford County, MD.
Local health codes require that meat be grilled for a minimum of 6 minutes. But really – who can be bothered to actually monitor how long you’re cooking? Certainly not your new cook, who undercooks the meat and gives food poisoning to everyone who came in that night. The ensuing investigation shuts your bar down for a week. See this link.
Your kitchen staff cuts corners on storing food and cleaning up. The rats have a field day – until the health inspectors show up and shut down the bar for a week. See this link.
Why is Loss Prevention Particularly Relevant to Restaurants and Bars?
Restaurants and bars have several characteristics that increase their risk of losses like these:
A high number of relatively small sales transactions, making it easy to hide improper transactions alongside the greater number of legitimate transactions;
All inventory is literally consumed – it can be hard to notice improper behavior when the perpetrators have drunk the evidence;
Busy, even chaotic environments, making it difficult to notice improper behavior;
High employee turnover, meaning management often can’t recognize a problem employee until it’s too late;
High employee turnover also means that employees often have little loyalty to the business, and those that are predisposed to behave badly have little incentive to improve;
A comparatively young and often inexperienced work force, many of whom have not yet developed good professional work habits;
A reasonably high percentage of managers and staff for whom their bar or restaurant job is merely a stopping point towards another career – and who therefore fail to develop the professionalism and skills needed to properly manage against Loss Prevention.
The Impact of Theft and Loss in the Restaurant and Bar Industry.
A study cited in an Oklahoma State University study estimated that costs associated with restaurant theft ranged from $3 to $6 billion annually.
The US Chamber of Commerce found that 75% of employees admitted stealing from their employer.
The US Department of Justice found that nearly 1/3 of employees commit some form of theft.
Estimates of the impact of theft and loss in the restaurant and bar industry vary, but several organizations cite National Restaurant Association data showing theft results in losses of 4% of total sales to as high as 7% of total sales (in quick-serve restaurants).
Theft in the restaurant and bar industry is particularly painful because profit margins are generally very thin. The profit margin for a specific bar or restaurant varies by type, geography and, most importantly, the skill and effort management places on loss prevention. But across the industry, profit margins typically range from 2% to 7%. A recent article in Forbes includes a chart showing profit margins for all types restaurants over the past 5 years averaging 2.3% in 2014 to 6.5% in 2018.
Let’s look at what this means in some real world settings, and we’ll use what we believe are fairly conservative numbers. We’ve described some common situations below (please note that none of these locations is an actual location).
Example #1: Joe’s Local Bar and Grill
Joe’s Local Bar and Grill is a mid-sized neighborhood restaurant and bar. Their annual revenue is $3,000,000. Joe, the eponymous owner, used to be on site roughly 24/7, but has scaled back his work schedule and now works about 8 hours/day. Most of the staff have worked at the bar for years, although new staff do cycle in and out from time to time. Joe’s serves food, but the majority of their sales is in liquor and beer, with a heavy reliance on less-expensive brands.
Loss Rate: 3% of total sales/year
Cost of Goods as % of Total Revenue: 20%
Cost of Lost Inventory: $18,000/year or $1,500/month
Lost Sales: $90,000/year or $7,500/month
Example #2: Neighborhood Billiards.
Neighborhood Billiards is a 5,000 square foot bar and restaurant in a mid-sized city. They have annual revenue of $5,000,000. They are owned by an off-site ownership group, but they have several on-site managers, many of whom are skilled, professional and dedicated. Neighborhood Billiards has been around for almost 20 years, and staff are a mix of short-time employees and long-term employees.
Loss Rate: 4% of total sales/year
Cost of Goods as % of Total Revenue: 20%
Cost of Lost Inventory: $40,000/year or $3,333/month
Lost Sales: $200,000/year or $16,667/month
Example #3: Party Central.
Party Central is the biggest bar on the campus of a large state university. Thursday through Saturday nights it’s packed with happy college and grade students. They have three levels, 6 internal bars and two dance floors. They have annual revenue of $12,000,000. They have a large staff, and with the exception of a few long-term managers, the staff are students and others for whom tending bar is a part-time job rather than a calling or long-term profession. As a result, the bar has high employee turnover.
Loss Rate: 5% of total sales/year
Cost of Goods as % of Total Revenue: 20%
Cost of Lost Inventory: $100,000/year or $6,667/month
Lost Sales: $500,000/year or $41,667/month
We know that actual Costs of Goods and Annual Revenues vary significantly among different establishments. If you’re interested in calculating the impact of Loss on your own bar or restaurant, contact us at firstname.lastname@example.org and we’ll send you a simple spreadsheet where you can input your own numbers.
Ways to Track and Prevent Loss.
There are countless options available to bar and restaurant owners to track inventory and minimize loss. Here are some common examples:
These range from jiggers and simple ball-pour spouts that dispense specific amounts of liquid to more sophisticated and complex mechanisms, such as an electronic system where the bartender must log the specific drink on the pouring device and the device will then dispense the proper amount of liquor; management then can run end-of-night reports to match drinks poured to the POS readouts.
Pros: Simple systems are inexpensive and easy to use. More sophisticated systems are more accurate and harder to bypass.
Cons: Simple systems are fairly easy to bypass; more sophisticated systems can be expensive, cumbersome or time-consuming to use, and can interfere with work-flow. Both systems require a fair amount of manual reporting and calculations in order to find and understand potential problems.
Many companies offer services to weigh bottles at periodic intervals. The difference in weight at each weighing tells you how much inventory was dispensed. Management can then compare those values to the values shown on the register for that time period. Solutions here range from simple spreadsheets on which to record bottle weights to more automated systems with sophisticated software that can calculate losses based on expected volumes and cost margins.
Pros: Theoretically very accurate as every drop of alcohol should be accounted for.
Cons: In practice, minor spills and over-pours can cause discrepancies. Can be bypassed by watering down bottles. Management still must do a fair amount of manual reporting, oversight and analysis to find and understand potential problems.
Bartenders can add water to inventory in order to cover up free drinks. A good hydrometer measures alcohol content and can tell you if your bottles are being watered down.
Pros: Cheap and easy to use.
Cons: Only useful for one specific type of theft (watering down bottles). Requires consistent monitoring and testing by management.
Periodic checks by a secret shopper is often a good idea just on general principle. A good secret shopper can report on a wide range of issues – from potential theft and loss to broader customer experience issues that can negatively impact operations and profitability.
Pros: Can identify a wide-range of customer experience issues in addition to theft and loss which can contribute to generally improved operations.
Cons: Because it is a spot-check audit, there’s a good chance an improper event won’t occur. And there are numerous examples of theft and loss that will not be visible to the secret shopper.
Video Monitoring Spot Checks.
Almost every bar has video cameras. Many managers and owners periodically log into their camera system to check-up on operations and in doing so, can often happen across a potential problem.
Pros: Fairly inexpensive because the process uses existing cameras. And letting employees understand they’re being watched has a broad chilling effect on improper behavior.
Cons: Unless audits are done frequently, consistently and for long periods of time – and most managers are too busy to devote that level of commitment – the chances that management is watching at the exact moment of a theft is unlikely. And the lack of formalized reporting means there is little way to identify trends and quantify the impact of certain behaviors. (For a more detailed discussion of the pros and cons of Video Monitoring Spot Checks, see our article on the issue.
Software-based Video Monitoring:
Some companies offer software-enhanced video systems that use automated systems to identify potential problems. The software is designed to automatically identify whether a bartender dispenses a beer bottle, cocktail glass, wine glass or other type of drink. The software than links to the POS system and attempts to confirm whether the dispensed drink appears accurately in the POS system.
Pros: Runs automatically; can provide comprehensive reporting over long periods of time to increase the chances of catching problems.
Cons: Accuracy varies significantly between systems and environments – for example, accuracy decreases significantly in busy chaotic environments. A software-based solution lacks flexibility to account for legitimate variations in behavior. Software can only track what it’s previously been programmed to find and can miss many events.
People-Based Video Monitoring Services.
A video monitoring service reviews the restaurant and bar video feeds and reports to management on employee and customer behavior. The service is conducted on a consistent basis and frequently rotates through different cameras to ensure that it covers the entire operation. Reports are provided to management that identify improper behavior so that management can take appropriate action.
Pros: Can identify a wide range of events and behaviors throughout an operation and the consistent nature of the service increases the chances that improper behaviors are found. Generally uses a facility’s existing cameras which reduces costs. Can usually be adapted to the specific needs of a location, and can be modified quickly and easily. Requires limited effort from management other than reviewing and responding to the periodic reports.
Cons: The location must have a digital video system that records and stores video and that can be accessed remotely. The POS system should be linked to the video system for the greatest impact.
How People Steal from Bars and Restaurants.
In our work, we are frequently dismayed (and, we must admit, sometimes impressed), with the ingenuity shown by enterprising employees looking to steal from their employers. Historically, most of these techniques took advantage of cash sales, and some techniques even acquired their own names (like the Wagon Wheel and the Short Ring).
Although the frequency of cash transactions has decreased over the past 10-20 years as credit cards have become more prevalent, the underlying human motivations that lead to loss and theft sadly have not. And with less cash transactions available, employees looking to improperly supplement their paychecks – or just not interested in making the effort to adhere to company policies – are creating losses in both traditional and innovative ways.
There are numerous lists on the internet of ways to steal from restaurants and bars. We like this one – which lists 50 ways employees steal from restaurants and bars. A somewhat more comprehensive list of 101 techniques can be found here.
Here are some of the most common techniques that we see in our work:
1. Free drinks to drive higher tips
2. Overpouring drinks to drive higher tips.
3. Serving high-end liquor or call brands while ringing up a beer.
4. Simply taking a bottle of alcohol home at the end of your shift.
5. Drinking the inventory!
6. Capitalizing on any gaps in managements reconciliation processes e.g. if management doesn’t carefully reconcile credit card receipts to POS to inventory, staff can reduce the price charged and increase the amount of the tip.
7. Pocketing all the cash!
The real cost of Loss isn’t the cost of the inventory – it’s the loss of profit associated with that inventory. And when loss or bad behavior becomes widely known and negatively impacts a business’ public reputation, the loss of customers can be even more significant. Here are some actual examples of bad customer behavior that severely damaged – and even closed – some establishments.
Loss prevention is a real. It affects every business (not just restaurants and bars!) and can have a material impact on the financial performance of your business.
But with a little forethought and some good decisions, it can be managed cost-effectively. A little bit of effort on loss prevention will protect your bottom line and free up management time and energy for the core mission – running a successful and enjoyable business.