F&B Insider is a special column that appears on occasion in the Small Business File. Each week the Small Business File addresses some interesting topic related to entrepreneurship or small business management in the Philippines. F&B Insider columns focus on issues of particular interest to those small business operators in the food and beverage and hospitality industries in the Philippines.
One of my favorite Seinfeld episodes was the one where George and Jerry try and explain ‘shrinkage’ to Elaine. In case you need to refresh your memory, search Seinfeld and Shrinkage in YouTube, and you should get directed to one of the many clips related to this episode.
In the F&B industry, shrinkage means something totally different from what George and Gerry have in mind. And it doesn’t have anything to do with laundry either, as Elaine might have offered. Instead, shrinkage has to do with loss of product that occurs due to a variety of reasons.
The most common forms of shrinkage are related to losses of product in the beverage department of a business. Shrinkage can occur because of employee theft, inaccurate pouring, customer returns, poor handling resulting in spillage, or the accidental breaking of bottles. The best way to reduce as much shrinkage as possible are to limit opportunities for any theft, and properly train your bar staff. You’d be surprised at how few managers take the time to train their bar staff in exactly how they should pour drinks, maintain an uncluttered work station, and how to keep bottles and other stocks safely out of the main traffic areas of a restaurant or bar.
How can one limit pilferage? The easiest way is through proper supervision. It is much easier for an employee to steal when supervision is lax. I can’t tell you how many foreign business owners complain they are being robbed blind, and yet fail to see that when they are present, nothing seems to go missing. If you have been made to believe you can open a small bar or restaurant and then hand over management to somebody else so you can spend your days at the beach or lazing about, then I’m afraid you and your bar or restaurant will likely be going your separate ways in a rather short period of time. You really need to be physically present much of the time.
The other way to limit pilferage is to split the two ends of every sales transaction. What I mean by this is have servers be responsible for serving, and a cashier responsible for verifying orders and concluding any sales with the customer. If a server is responsible for both, it is easy for them to be tempted into serving the customer and accepting payment, but with the proceeds going directly into their pocket and no sale being recorded whatsoever. This tactic by unscrupulous staff members can devastate a bar or restaurant. Limit pilferage by being present as much as possible and try and split up the sales transaction by making sure there are separate servers and cashiers with different responsibilities.
Training staff properly is also an important step in reducing shrinkage. If a staff member is not told to pour exactly 1 ounce, and how much that is, it can be easy for a novice server to over-pour a drink. Your staff needs to be taught that every drop counts. This is especially true when you serve premium brands. Over-pouring house brands will sting the pocketbook a little. Over-pouring a premium brand can be extremely costly to the business. Train your staff to pour or serve the exact amounts.
Training should also include having a system for dealing with busy periods in a shift so as to avoid making the wrong order for a customer. Make sure there is a system for staff to know which order to work on and in what order. There is nothing more frustrating for an employee than to be given a bunch of orders at once. In many cases, somebody will end up with the wrong order. Wrong orders get returned, and this costs the business money. Furthermore, properly storing inventory saves money too. Keep bottles away from high traffic areas where they can get inadvertently bumped-into and broken. A little bit of good old fashioned organizing can save you losses of product.
Two final points. First, try and get into the habit of doing frequent inventory checks. The more frequently you check your inventory, the more likely it will be that staff will be concerned with properly pouring or serving the correct portions, and also feel less temptation when it comes to pilfering a free drink for their friends or fail to ring up every order made by a customer. Once you know how much inventory should be present and how much sales should have reduced the inventory, you get a pretty clear picture of just how much shrinkage you have in your operation. Frequent inventory checks also help you keep on top of your inventory — you are more likely to have a better handle on ordering stocks if you make regular inventory checks.
Lastly, remember that providing complimentary drinks or meals is something that needs to be monitored very closely. Every time you hand out something ‘compliments of the house’, you are giving away money, and this can be very dangerous to businesses that operate on very tight margins. If you do feel compelled to provide complimentary meals or beverages, make sure such freebies are accounted for. Actually note the loss in your sales journal, so you can see how they affect your daily take. When you institute this policy you will see exactly how much complimentary meals or beverages are costing you.
Good luck in finding ways to eliminate shrinkage in your F&B business. Until next time, Bon Appétit!
More and more expats and OFW’s are getting involved in small businesses that fall under the food & beverage industry umbrella. F&B Insider articles will focus on some of the key issues that can help small business owners gain an edge over other establishments in this very competitive industry.
About Martin
Hi, Martin- I can relate well to all the points you covered about running a successful food and beverage business, as I have in the past spent some time at my sister’s and her husband’s very busy steakhouse in Keyser, West Virginia, during holidays and some weekends for the purpose of observing firsthand the operations of a restaurant for possible future application upon my return to the Philippines. Aside from enjoying the former Samson’s Steakhouse’s very popular and signature dish called, The Magnum Steak and Quail, which had, btw, a hint of the Orient in its ultra-secret marinade sauce concocted by my sister, I was often asked by her to provide general management and supervision of the dining room and the kitchen during busy nights while stationed behind the maitre d’s podium greeting and seating guests, while she retired downstairs in her office to balance the books. I was more than happy to oblige, as it provided me with great learning experiences as well.
Everything that you said regarding employee training and supervision, employee pilferage and theft, accurate pouring of drinks especially the premium brands, proper storage of inventory to avoid breakage and spillage, management presence on the premises, and conducting frequent inventories, are all excellent points to remember if one expects to succeed in the restaurant business. I’d like to share some of my experiences of the time at Samson’s Steakhouse in relation to some of the points you have covered.
Regarding splitting the two ends of each sales transaction, to minimize pilferage in your own words, by having the server at one end, who takes, places and serves a food or beverage order, and having the cashier at the other end who accepts, processes, and concludes the transaction, Martin, I have to tell you that this system is not only antiquated but could be very dangerous as well. It harks back to the age before the advent of computers.
Having only two ends at each sales transaction system invites fraud. If you have a dishonest server working in collusion with an equally corrupt cashier, and its a a cash transaction, it’s all over. The two would be splitting the proceeds at the end of the night, and the restaurant owner is left clueless. Heck, this is not even pilferage, it’s felony theft. If done frequently for a long time and not detected, it could bring the house down.
With the use of computers, you have more than two ends of each sales transaction and avoid human manipulation altogether: dining room, kitchen, bar, cashier, and in the mainframe downstairs where my sister is currently at work.
The taking of incorrect orders, or placing incorrect orders to the kitchen/bar via the computer is a sign of server stress. To use the server lingo, the server is “slammed”. It means the server has more customers than he/she can handle at a given time. The person stationed behind the podium responsible for seating guests has the responsibility for ensuring that guests are seated equally among the servers’ stations and must have a constant awareness about the seating intervals within a given server’s station. Just because you like this pretty, blonde server, you can’t seat too many customers at her station all at one time with the hope that she’ll return the favor and date you at the end of the shift. Once she’s slammed, it will be hard for her to recover. She’ll make mistakes one after the other, and there’s a domino effect of those mistakes. For one, they will affect the kitchen’s timing and the flood of orders coming in steadily via the kitchen printer, especially on busy nights because the wrong order has to be re-cooked. This mistake inevitably will result in the delay of serving the food to the now-impatient customer, who may or may never return to your restaurant because of the experience. A possible loss of revenue right there, but take heart.
In this instance, damage control must be instituted quickly and decisively, if you expect a return business from the disgruntled guest. A good maitre d’ (that was me, btw), should be alert and not have wandering eyes to be able to sense that there’s trouble at his favorite honey’s station across the dining room. He should approach the aggrieved guest’s table and apologize profusely, then do one of the following: offer a drink on the house, void the cost of the meal, or offer a free meal at the next visit. The house has to absorb a minimal loss, but at least a return business might be possible as a result of the well-applied damage control.
From the above, I think it’s easy to discern why I’ve always looked forward to visiting Samson’s Steakhouse in Keyser, West Virginia, in those days – not just for the enjoyment of The Magnum Steak and Quail, but some of the perks that came along with it as well.
Another excellent and prectical article! I second the idea that the owner should be on site as much as possible, not only to prevent theft, but to make sure the customers are being served well. Managers and servers know only to follow the owners rules and are not prepared to make a call in favor of the customer.
When they oppened, we tried two excellent restaurants here in our town. One is run by a Chinese lady who practically lived there for the first 10 years of operation. Because she was there, questions were refered to her. We could ask for stronger tea on our jet tea with mango, we could substitute some extra veggies for the rice, etc. We became friends with the owner and she now uses my recipe for Ranch Dressing. She knows what goes on there and is aware of what her customers want. she has a lot of repeat business, even though many new restaurants are opening up all around her.
The second restaurant has excellent food and amazing desserts, but the owner was absent most of the time. When we went there, near the time of their opening, my husband ordered hot tea. It was expensive, P45, I believe and came in a small styro cup (!). When he asked for some evap to put in it (rather than the offered Coffeemate) a huddle took place at the register and he was brought a small bowl of liquid milk. We were shocked to find we were charged an additional P15 for that milk! (And this was some years back!) The staff was more concerned with upsetting the owner than with serving the customer well. If the owner had been onsite, he could have made the call and had a happy, faithful customer. That was a pretty expensive P15, we didn’t go back to that place for about 5 years, and then because a friend invited us to go with him.
Hi Martin,
One trick that some crooked bartenders here in the States do is to bring their own stash of alcohol, serve them instead of your inventory and pocket the sales. You can do as much inventory as you want, they’re not stealing your alcohol, just stealing the business.
Glenn B.
Thanks again for sharing John.
I don’t agree with much of your assessment, but hey, everyone is entitled to their own opinion. I’m sure there are people who will want to travel down the same path you are advocating. It’s a free country. What works for some may not work for others.
Please understand that for the past year I have been writing this column with a small business owner in mind, so that necessarily means I need to tailor my topics to businesses that operate within certain budget limitations. This is not a column geared towards establishments that serve XO Hennessy. This column is geared towards smaller bars and restaurants that face more down-to-earth issues. For example, brownouts are a major issue in many parts of the Philippines. Computers and brownouts don’t really jive. Most small bars and restaurants don’t have a generator either. So if there’s no budget for a generator, you can imagine just how big the budget is for a POS system. But I’m sure your comments are great for those wanting to open a much more sophisticated establishment.
Thanks again, John.
Hello Martin,
That horrible word “shrinkage”. Many ways, and I know your article is about the Food & Beverage industry mostly..but customer theft is one of the biggest shrinkage here in Palm Beach County Florida, employee theft is probably second..as far as retail goes. Receiving clerks are very important..to have a trusted employee receive an order.
Now I know this isn’t always a problem wit small business owners..because I am guessing they will check in the items most of the time.
But with some of the big box companies I have worked for, we have trailers just dropped off, and the invoices confirmed with out checking it. Also trailers unloaded by the pieces..some trailers with 2000 to 3000 pieces..so it is not counted..just confirmed automatically.
But usually a good dept. manager will catch it, a pallet missing here, a pallet went to this store instead of my store..things like that.
Great article..please take care.
Danny
Hi Martin,
An excellent checklist of dos and don’ts for keeping pilferage at a minimum. Great feedback from your readers as well.
We started our bar/restaurant with an ad-hoc business plan (one of those paper napkin deals over one too many drinks)and zero experience. So we can attest to a few scenarios that you and your readers mention above. We’ve learned our lessons the hard way and have paid dearly
Over the years, we’ve implemented most of the systems mentioned as gaping holes were discovered – often too late. . . but still better than never.
I would be interested to know if there is such a thing as an open- source restaurant POS system. I am a big fan of automation in terms of reports, metrics and tracking. This manual way of doing stuff is just way too painful (even just to watch). But an even bigger fan of “free”.
Hoping all is well everyone.
cheers,
Dennis
Hi Martin,
May thanks for the feedback.
P70k for a basic system sounds a little rich for what I am trying to do. I may be able to justify investing in an extra PC but considering that the rest is software…
My quest for all things open-source continues. I’ll let you know if I find anything.
Thanks again.
cheers,
Dennis
Hi Dennis,
I agree, the starting point for a POS system is quite pricey for most small businesses. It’s not to say they aren’t worthwhile once you reach a certain level of sales, as I think later on it is a natural add-on to a business. But until you reach those levels of sales where they are justifiable, I think small business owners can generally find better uses for their P70,000 that will add more value for their customers.
Thanks, as always, for dropping by!
Hi John,
Thank you for sharing your comments and experiences. I’m glad you could relate to this article. I think you have offered some good ideas that people will surely ponder and see if they can use in their own business.
I do think you may be offering some ideas that don’t fit exactly with the realities of running a small F&B operation in the Philippines. Computer systems and mainframe computers? It just isn’t possible for most small F&B outlets. Yes, big chain outlets have POS systems, but most small restaurants and bars do not.
There is always going to be the danger of pilferage in any operation. Splitting the duties between a server and a cashier splits the problem and makes it more difficult to cheat. You need collusion to cheat when more than one person needs to be involved in the transaction. Splitting the duties and being present are the main thrusts of this article, and using the two together are basically the ingredients to success in limiting shrinkage due to pilferage in the Philippine context.
I also agree that complimentary drinks/meals, better known as ‘comps’, are a part of the F&B industry. I also think they are abused in many cases, and many small business owners don’t have a great handle on when they are a good idea and when they are not. In the Philippines, you have to be very careful with ‘comps’. You’d be amazed at how many half-eaten entrees get returned when word gets out your restaurant is too liberal with ‘comps’. It’s almost like Pandora’s Box — once you go down that path, it is very difficult to go back.
Keep the comments coming! These are the kinds of exchanges that help small business owners think through what works abroad and what works best in the Philippine context.
Cheers!
Hi American Lola!
I agree 100% with both of your comments. Being physically present helps deter pilferage, but also allows the owner to get to know their customers. It also helps serving staff learn the ropes so the business doesn’t fall victim to the second problem you bring up — being more afraid to upset the owner. When staff see how the owner handles problems that come up, they are much better prepared to deal with customer service issues that arise later on when the owner is not present. Good staff, who are given some freedom to make decisions, often do a fine job once they know what is expected.
As always, thanks for sharing!
Hi, Martin- I’m astounded to learn that “most restaurant and bars” in the Philippines do not have computers. I can understand if the F&B is a street corner Mom and Pop operation whose average sales do not warrant purchasing a computer, but I don’t think that a restaurant necessarily has to be a “big chain outlet” to computerize, either. For those in between, I believe that computerization is still the way to go. Advocating the correct pouring of premium as well as rail brands as a way to minimize shrinkage in its beverage department is to me an indication that the F&B to which the caveat is addressed is big enough to justify computerization.
With a computer, you can eliminate the cashier in most cases. The money saved for not having a cashier can be applied towards purchasing a simple, inexpensive computer system that can perform so many time-saving functions such as payroll, bookkeeping, purchasing, tracking of sales trends that allow forecasting and eliminating products that do not move.
If the owner is performing these time-consuming functions by hand, that effectively takes him away from the floor where he ought to be providing supervision without mentioning that so important visual presence necessary to deter staff who may be inclined to pilfer and for the guests for PR value. The computer can also detect suspicious activity by the sales staff, if one knows what to look for.
In this scenario, the server carries his own bank and is responsible for both ends of a sale transaction. There is no cashier here for the server to collude with for the purpose of defrauding the boss.
The computer removes the possibility to commit fraud, as all orders going to the kitchen and to the bar must be entered into the computer by the server.
Should a server go to the bar and verbally places an order for, say, a shot of Courvoisier XO, the bartender must be steadfast in instructing the server to put the order in into the computer. Possible collusion with the bartender here? Yes, it’s entirely possible. No system is completely safe, and this the major reason why the owner needs to be on the floor monitoring activities, instead of being somewhere balancing the books by hand. Without a computer record of the shot of XO being sold, the dishonest server can easily pocket the customer’s payment for the drink, which hovers around the vicinity of what, around $16 per shot?
From time to time, an honest mistake by the server or the bartender would require voiding an item from a check. In this connection, management and management only has the authority to void. Servers and bartenders should never be allowed to void an item from a check without management approval for obvious reasons.
At the end of the night, the server turns in his bank (cash and credit card receipts), less his cash tips, along with a computer printout of his sales for the night to the management. The only downside to having the server carry his own bank is, a server may skip out in the middle of a shift as he begins to accumulate lots of cash receipts in his bank during the course of the shift. Again, management awareness of what’s going on in the dining room is crucial. Management can determine how much a server has in his bank at any given time with a click of the mouse, and should therefore keep an eye on the server most susceptible to skipping out. In both the U.S. and Philippine context.
Hi, Martin- I’m astounded to learn that “most restaurant and bars” in the Philippines do not have computers. I can understand if the F&B is a street corner Mom and Pop operation whose average sales do not warrant purchasing a computer, but I don’t think that a restaurant necessarily has to be a “big chain outlet” to computerize, either. For those in between, I believe that computerization is still the way to go. Advocating the correct pouring of premium as well as rail brands as a way to minimize shrinkage in its beverage department is to me an indication that the F&B to which the caveat is addressed is big enough to justify computerization.
With a computer, you can eliminate the cashier in most cases. The money saved for not having a cashier can be applied towards purchasing a simple, inexpensive computer system that can perform so many time-saving functions such as payroll, bookkeeping, purchasing, tracking of sales trends that allow forecasting and eliminating products that do not move.
If the owner is performing these time-consuming functions by hand, that effectively takes him away from the floor where he ought to be providing supervision without mentioning that so important visual presence necessary to deter staff who may be inclined to pilfer and for the guests for PR value. The computer can also detect suspicious activity by the sales staff, if one knows what to look for.
In this scenario, the server carries his own bank and is responsible for both ends of a sale transaction. There is no cashier here for the server to collude with for the purpose of defrauding the boss.
The computer removes the possibility to commit fraud, as all orders going to the kitchen and to the bar must be entered into the computer by the server.
Should a server go to the bar and verbally places an order for, say, a shot of Courvoisier XO, the bartender must be steadfast in instructing the server to put the order in into the computer. Possible collusion with the bartender here? Yes, it’s entirely possible. No system is completely safe, and this is the major reason why the owner needs to be on the floor monitoring activities, instead of being somewhere balancing the books by hand. Without a computer record of the shot of XO being sold, the dishonest server can easily pocket the customer’s payment for the drink, which hovers around the vicinity of what, around $16 per shot?
From time to time, an honest mistake by the server or the bartender would require voiding an item from a check. In this connection, management and management only has the authority to void. Servers and bartenders should never be allowed to void an item from a check without management approval for obvious reasons.
At the end of the night, the server turns in his bank (cash and credit card receipts), less his cash tips, along with a computer printout of his sales for the night to the management. The only downside to having the server carry his own bank is, a server may skip out in the middle of a shift as he begins to accumulate lots of cash receipts in his bank during the course of the shift. Again, management awareness of what’s going on in the dining room is crucial. Management can determine how much a server has in his bank at any given time with a click of the mouse, and should therefore keep an eye on the server most susceptible to skipping out. In both the U.S. and Philippine context.
Hi, Martin- I’m astounded to learn that “most restaurant and bars” in the Philippines do not have computers. I can understand if the F&B is a street corner Mom and Pop operation whose average sales do not warrant purchasing a computer, but I don’t think that a restaurant necessarily has to be a “big chain outlet” to computerize, either. For those in between, I believe that computerization is still the way to go. Advocating the correct pouring of premium as well as rail brands as a way to minimize shrinkage in its beverage department is to me an indication that the F&B to which the caveat is addressed is big enough to justify computerization.
With a computer, you can eliminate the cashier in most cases. The money saved for not having a cashier can be applied towards purchasing a simple, inexpensive computer system that can perform so many time-saving functions such as inventory, payroll, bookkeeping, purchasing, tracking of sales trends that allow forecasting and eliminating products that do not move.
If the owner is performing these time-consuming functions by hand, that effectively takes him away from the floor where he ought to be providing supervision without mentioning that so important visual presence necessary to deter staff who may be inclined to pilfer and for the guests for PR value. The computer can also detect suspicious activity by the sales staff, if one knows what to look for.
In this scenario, the server carries his own bank and is responsible for both ends of a sale transaction. There is no cashier here for the server to collude with for the purpose of defrauding the boss.
The computer removes the possibility to commit fraud, as all orders going to the kitchen and to the bar must be entered into the computer by the server.
Should a server go to the bar and verbally places an order for, say, a shot of Courvoisier XO, the bartender must be steadfast in instructing the server to put the order in into the computer. Possible collusion with the bartender here? Yes, it’s entirely possible. No system is completely safe, and this is the major reason why the owner needs to be on the floor monitoring activities, instead of being somewhere balancing the books by hand. Without a computer record of the shot of XO being sold, the dishonest server can easily pocket the customer’s payment for the drink, which hovers around the vicinity of what, around $16 per shot?
From time to time, an honest mistake by the server or the bartender would require voiding an item from a check. In this connection, management and management only has the authority to void. Servers and bartenders should never be allowed to void an item from a check without management approval for obvious reasons.
At the end of the night, the server turns in his bank (cash and credit card receipts), less his cash tips, along with a computer printout of his sales for the night to the management. The only downside to having the server carry his own bank is, a server may skip out in the middle of a shift as he begins to accumulate lots of cash receipts in his bank during the course of the shift. Again, management awareness of what’s going on in the dining room is crucial. Management can determine how much a server has in his bank at any given time with a click of the mouse, and should therefore keep an eye on the server most susceptible to skipping out. In both the U.S. and Philippine context.
If the business has a computer to begin with, this won’t happen, as the owner can easily tell why a certain brand of liquor is not selling, or underselling, during certain shifts or certain days. The computer can practically tell the owner which bartender is stealing his business.
Hi Glenn,
That’s a great point you’ve made! Bringing in outside bottles is a crafty ply — a way to steal business, but not necessarily inventory. Thanks for sharing another real-world example of what small business owners need to be on the lookout for.
Thanks for sharing!
And once the owner detects a suspicious pattern in the computer sales record, he can plant a “customer” at the bar to catch the cheating bartender red-handed.
The importance of having a computer in a business environment cannot be underestimated. The computer may be the businessman’ best friend, aside from his dog.
Hi Danny,
Thanks as always for sharing your angle on topics like these. It’s great that you commented on the retail angle. I only looked at the issue from the F&B side of things, but you’re very correct in that it is a problem in other industries as well.
I don’t have experience in big-box retail, so I was really shocked at how you gave examples of entire trucks and pallets either being missed or purposely miscounted. That’s a huge problem, and the losses could potentially be enormous. It goes to show how important it is to be on the lookout for ‘shrinkage’ in just about every size of business or organization.
Cheers!
Hi Dennis,
Thanks for dropping by again! I am not aware of any open-source POS systems, but that doesn’t mean they don’t exist. Perhaps someone else with knowledge can jump in.
If your operation has grown big enough to make use of a POS system, then I do know there are many commercial groups that can put together a specific package for your business. We’ve had 4 companies provide us with quotes in the past year or so. Two of the quotes came from outfits in Davao, so you should be able to get into contact with someone locally. How expensive the system is depends on how big or complex the work is, and whether you want multiple stations or not. If my memory serves me correct, the prices ranged from P70,000 for the basic system and requirements and went up from there.
I hope this is helpful.
Cheers!