Restaurant Shrinkage: 6 Tips to Reduce Inventory Variance 

Managing rising food costs and finding new ways to optimize operations and increase margins are obstacles all restaurants face. A notorious culprit for slim margins? Restaurant shrinkage. Keeping profit margins at a healthy percentage is a priority for restaurant owners, given the slim margins in the industry. Understanding where your restaurant shrinkage is coming from is the first step in creating a strategy to reduce and manage it. 

We’ll go over what restaurant shrinkage is, what causes it and how to reduce it. 

• What is restaurant shrinkage?
• How to calculate your restaurant shrinkage rate
• Common causes for restaurant shrinkage
• Tips to help you reduce restaurant shrinkage

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What is restaurant shrinkage?

Not everything that makes it into your restaurant inventory ends up on your customers’ plates. Restaurant shrinkage occurs when you have less inventory than purchased. This includes theft, wastage, breakage and spoilage. 

How to calculate restaurant shrinkage rate

Your shrinkage rate will give you a numerical value that lets you compare your restaurant to the rest of the industry. To calculate your shrinkage rate, you will need your recorded inventory and your current inventory. 

(Recorded Inventory – Current Inventory)/Recorded Inventory= Shrinkage rate

Common causes for restaurant shrinkage

Inventory management 

There are several reasons why some inventory would automatically fall into your shrinkage calculation. If you accidentally over ordered inventory one month and you aren’t able to find an alternative use to those ingredients, you might find yourself adding expired inventory to your shrinkage rate. 

If certain ingredients you ordered are spoiled or if a bottle is damaged on arrival, this would all add to your shrinkage rate. Anything that’s damaged and can’t be consumed later on, can be considered part of shrinkage. 

Another more common reason is raw portions that can’t be consumed. Not every part of the raw inventory is edible or tasty enough to go into your final dish. Trimmings discarded during prepwork or any part of the ingredient that doesn’t end up in your customer’s plate will fall into the shrinkage category. 

Human error

Humans aren’t perfect, and sometimes food gets burned or mishandled throughout the prepwork process. If a piece of steak ends up overcooked, or a pint of beer comes out with too much foam, all of this will end up in the trash and right into your shrinkage pile. Anytime customers turn away a drink or a dish because of poor taste or because they found an issue with it, as well as anything that’s burned, stored incorrectly or damaged adds to your shrinkage rate.

Theft

Probably the biggest source of shrinkage is one of the toughest to handle: theft. Approximately 75% of all inventory shrinkage is a result of theft. With the high turnover rate of staff in the restaurant industry, it’s only normal that trust and proper practices aren’t easy to maintain with everchanging staff. Everything from actual theft, to giving away drinks or food without authorization can add to your shrinkage. 

Tips towards shrinkage control

From May 2021 – May 2022, inflation increased on average .98% per month. Paired with higher diesel prices and labor costs, this could have an impact on restaurant margins. Now more than ever, restaurateurs need to strategize about how to manage food costs and shrinkage to ensure their margins remain healthy. 

Unfortunately, shrinkage is a part of all businesses, and can’t be completely removed, only controlled. Acknowledging that shrinkage is a normal part of inventory and operations, and creating controls to reduce it will go a long way in the journey towards increasing profitability and efficiency. 

Reducing employee turnover 

While reducing turnover is easier said than done, it might be what your restaurant needs to reduce your shrinkage rate and help you add efficiencies in your back and front of house. 

The restaurant industry is known for its chaotic employee environment, but it doesn’t have to be that way. Communicate with your employees often and give them constructive and positive feedback. Foster an environment where communication is encouraged and employees feel their contributions are valued. Adding benefits and competitive wages will also help ensure you’re retaining staff for the long term. The higher your turnover rate, the harder it will be to reduce shrinkage and ensure your policies are met. 

Regular employee training 

Never underestimate the power of training. If you want to reduce wastage in your kitchen, you need to implement proper training procedures. If you notice certain items are frequently burned or mishandled, this is a teachable moment for your staff. It’s also important to teach staff how to use every part of the ingredient, to eliminate wastage from trimmings. A lot of trimmings from vegetables and meat products can easily be used in a stock to maximize their value. Incorporate practices that make the most of your ingredients and train your staff on it. 

It’s also essential to educate your staff on proper storage techniques and food handling. While a lot of your staff will likely already be trained in some or most of this, it’s still key to provide refresher training that applies to your specific restaurant. Identify the areas of your business where you’re seeing the most waste (food mishandling, trimmings, etc) and use these as training opportunities.

Menu reduction 

When you have a large menu with widely different dishes, you’ll likely run into added wastage and spoilage. While offering many menu items can seem like a great way to get a wide range of tastes to your door, it might end up costing you.  Customers might not order certain dishes often enough and those ingredients might be going bad in storage. By analyzing what your top and worst sellers are with your point of sale’s analytics, you’ll be able to identify which dishes stay and which need to go or change. With a reduced menu that uses similar ingredients in different ways, you’ll be able to make the most out of each ingredient and reduce the amount of spoilage. 

Theft control 

The big one! How do you reduce theft? There isn’t one clear-cut way, however, there are some measures that as a restaurant owner you should feel empowered to take.

Reducing employee turnover is one of the best ways to reduce theft. It’s hard to keep consistent measures when staff changes on a regular basis. Priority number one should be to implement practices that keep great employees around for the long term.

If theft is prevalent in your business, you might need added monitoring. Installing a video security system in key areas of your restaurant (storage for example) will let you keep tabs on who’s taking out what and when. 

Count inventory regularly. If employees know that inventory is frequently and diligently monitored, there will be less motivation to take up theft. This also means regularly using your restaurant point of sale to view sales, employee and inventory reports. 

Offering staff meals and having a very clear policy around free or discounted meals is a great benefit for staff and also removes ambiguity as to what they can take and when. 

Finally, limiting access or controls in your point of sale to specific staff. By enabling specific permissions in your POS to only certain essential staff, you’ll reduce the odds of shrinkage. 

Track your wastage

A wastage log is a great way to get a better understanding of where your shrinkage is coming from. Are the same ingredients expiring over and over again? You might need to order less or talk to your vendor to see if you’re getting the freshest items. Have you noticed that you have to cut out a lot of fat from the meat you’re ordering over and over again? Looking into other suppliers might be an option to get the highest quality, least wasteful raw ingredients. Tracking your wastage will let you pinpoint where your issues are coming from and if you find patterns, you’ll be able to start devising a plan to reduce the amount of restaurant waste. Your waste log can be as manual as using a spreadsheet or as automated as using an inventory management system with your point of sale to see what you’ve wasted. 

Automated inventory management 

Accurately forecasting demand and ordering accordingly can be a game changer in the battle against rising food costs and shrinkage. For this you’ll need to understand your par levels and how much you’ll go through in each particular ordering cycle. Doing this manually can easily pave the way for human errors and mistakes in the ordering process. Inventory management is an essential part of running a restaurant and also one that can be easily automated to reduce errors and lower costs. 

With automated inventory management that’s integrated with your point of sale you can: 

• View current stock on hand and stock value
• Simplify your process through real-time deductions when you sell items and replenishments when you order 
• Minimize loss due to spoilage or even theft
• Easily calculate recipe costs and understand your margins

By switching from spreadsheets to an automating inventory management system you’ll lower your risk of inaccurate ordering and replenish inventory when you need it. 

Reducing shrinkage with automation

Shrinkage will always be a part of running a restaurant, but the more you understand it, the better you’ll get at reducing it. Start fighting the long term battle against shrinkage by lowering employee turnover, implementing strong policies and employee training and having top-notch technology that helps you keep track of your inventory

Looking to upgrade your inventory management? Talk to one of our experts to find out how Lightspeed can help.