Targeting Groupon Diners

If I had been the founder of Groupon when Google offered up $6 billion for it, the door wouldn’t have hit me on the back-side as I rushed to the bank to cash the cheque! While I think Groupon is an interesting concept, they are really greedy, and ultimately, it will be their downfall. Let me explain.

Groupon seeks out businesses that are willing to offer deep discounts for their goods and services. Usually, the discounts are around 50%. Groupon takes another 25% or so for publicizing the offer and collecting the funds from the bargain-hunters. That leaves the business with only 25% of what it would normally take in on a sale.

Groupon talks businesses into signing up by claiming that they may lose a bit on the first sale, but they will make it up on subsequent sales. Nonsense. Alternatively, if businesses have excess capacity, they can accommodate lower-paying customers, because they only have to cover the incremental (or marginal) cost of servicing the customer. This works for spas and other similar businesses. There aren’t too many businesses that have a marginal cost less than 25%.

What about restaurants? They are probably the most popular Groupon category, based on demand. Is it worth it for a restaurant to sign up for Groupon?

This will be the last in my series of articles on Groupon certificates (I hope)!  Previously, I’ve written about the accounting for Groupon certificates, setting up a Point of Sale system to accept Groupon certificates, using QuickBooks to account for Groupon, and the tax implications of doing a Groupon promotion.  This article looks at whether you should consider using Groupon to promote your business.  Since this is a site dedicated to restaurants and their owners, I’ll focus on them.  However, most of the concepts apply to any business.

 

How Groupon Sells to Businesses

Groupon claims businesses will get a fair amount of repeat business (1 – 2 subsequent visits), at full retail. Many restaurateurs think that, if they could only get people in the door, they would experience how great their restaurant is and return again and again. In some cases this will be true, but for most it will not. You can’t take anyone off the street and get them to like your restaurant. They have to be the type of people who would value the dining experience you are providing and would be willing to pay the price you need to charge to maintain that level of quality, service and ambiance.  In other words, if you can get potential customers in your target market to try your restaurant, you have a chance at winning them over.

Now, if a Groupon bargain-hunter finds your restaurant to be a good value, with the deep discount, is it likely he’ll feel the same way when he has to pay full menu prices? No. No.  No! The value proposition, that was there with the heavily discounted price, disappears when the regular menu prices are in effect.

Having experience with deep discount programs, like Toronto’s Summerlicious and Winterlicious, where restaurants provide three-course lunches and dinners for a set price, I can tell you that very few of these diners ever return to your restaurant. I estimate that perhaps 1% do return when regular menu prices are in effect. The conclusion is that these discount diners are not your target market.  They simply do not recognize the value of your offerings, at regular menu prices.

 

Where Groupon Works

I know of one restaurant that uses Groupon (and other similar programs) quite a bit. It is a large establishment that is rarely filled to capacity. The Groupon coupons cost $30 and are redeemable at $75. This allows the individual to buy two main courses and they have to buy everything else at full menu prices. The only way this works for the restaurant is when the Groupon diners buy appetizers or desserts and wine or other alcoholic beverages. It’s better than getting nothing for an empty table. If they were busier, it would make no sense at all for them to use Groupon.

It helps that this restaurant has relatively high prices.  A couple, using a certificate, has to purchase more items to complete a normal dining experience.  The high prices for all items ensures that there is some marginal profit for the restaurant, even if they aren’t covering all costs.  Servers need to be especially adept at up-selling and cross-selling to make this model work for the restaurant.

It works for this restaurant, because the total revenue from the diners is greater than the variable cost of providing the food and beverages (plus linens, credit card discounts and any other variable costs).  They don’t care whether the coupon diners ever return to pay full menu prices, because they will not.  These customers will only return when the next coupon batch is issued.

 

Where It Doesn’t

 

Another restaurant has offered Groupon discounts at various times. It is a popular restaurant that is difficult to get into without a reservation. I suspect they will discontinue all Groupon discounts in the near future, because they aren’t adding to their loyal customer base, and most likely, they are risking their existing customers by making it harder for them to get reservations and by making them pay full price when transient customers are getting deep discounts. They are damaging their profitable customer base, to go after fickle, extremely price-conscious customers who don’t value their dining experience nearly as much. That’s just bad marketing.

 

What Are The Risks?

A lot of restaurateurs know that these types of promotions are not good deals.  Still, quite a few say, “let’s give it a try”, “what’s the risk?”  You’d be surprised.  Let’s take a look at those risks.

Have you considered your restaurant’s brand image?  Accepting Groupon changes your image from “quality” and “successful” to “cheap” and “desperate”.  Is that what you want?  The internet, Facebook and Twitter all ensure that your acceptance of Groupon, even once, is etched in digital stone for all to see, from now until the end of time (or your restaurant).  All of a sudden, that simple promotion has become extremely expensive.

Are you still clinging to the belief that some of these coupon clippers will become regulars at your restaurant?  Even if you provide exemplary service, impeccably prepared and presented mains, appetizers and desserts, they’re not going to be overly impressed with your efforts.  True, they will tell their friends about their good experience at your establishment – one or two of them, according to research.  Undoubtedly, these two people will be similar-minded consumers.  They won’t be coming to your restaurant, unless they have a coupon.

What if the service isn’t so great, the dishes are not so perfectly plated and tasty?  What if your expert service staff really were able to up-sell and cross-sell.  These coupon diners are not going to be pleased.  They’re going to think they were “ripped off”.  Well, now, you will have unleashed a torrent of critical word-of-mouth.  The internet, Facebook, Twitter, Yelp and many more sites will ensure that everyone knows what you did to this poor, unfortunate couple (who probably came in on their anniversary or birthday for a very special evening).  Word-of-Mouth advertising cuts both ways.

What about your “regulars”?  How do you think they will feel, paying full menu prices, when you’re giving the food away to people who will never return?  I know how I’d feel, and I’m sure you do too.  So, do you make sure your regulars can get in on the deal too?  Why in the world would you do that?  They already appreciate the value proposition you have developed for your successful restaurant.  You don’t need to convince them with a lower price.

If your restaurant gets inundated by coupon shoppers, how will you make sure that your regulars get a seat when they want one?  The good customer who can’t get a reservation at your place today is going to go somewhere else.  Somewhere that cares about their customers and may be on the way to earning a new “regular”.

This begs the question.  Why are you investing so much time and effort trying to market to non-target customers?  Wouldn’t those resources be better used making sure your regular customers are properly looked after and trying to win over more similar minded people?

 

The Bottom Line

If you really are intent on giving away money, why not give it to potential target customers?  Most restaurants rely on neighbourhood residents (or businesses) for the majority of their clientele.  You may think that everyone knows about your restaurant, but they don’t.  Instead of giving away money to people outside of your target market and target area, why not provide a reasonable trial discount to people (or businesses) in your area?  The added benefit is that you don’t have to pay Groupon or anyone else for the right to give away money!

 

 

QuickBooks Accounting for Groupon

I’m almost finished with Groupon articles!  I’ve got two more, then, I think we’re done.  I’ve been writing these articles, because there is a lot of confusion surrounding the accounting for Groupon certificates and how to enter them in QuickBooks.  The resources for learning about these areas are poor (and often contradictory), but that’s nothing compared with the confusing, and often downright incorrect, information that has been written about the tax implications of using Groupon!  I hope these articles will help accountants, bookkeepers and restaurant owners set up their books and account for these transactions properly.

Today’s article explains how to account for a restaurant’s Groupon transactions in QuickBooks.  Previous articles have covered the POS system set up for Groupon transactions, accounting for Groupon transactions (in general), and the very important tax implications of using Groupon in a restaurant.

As we know, from the accounting article, there are three types of Groupon transactions that need to be entered into QuickBooks:

• Initial setup and distribution of the Groupon certificates
• Daily redemptions of certificates
• Expiry of unused certificates

New Accounts

Before we get started with the entries, you’ll need to set up three new accounts.  An expense account (Promotional Expense – Groupon) to report the cost of the Groupon certificate promotion.  Alternatively, this may be set up as a sales discount.  We’ll also need a current liability account to keep track of the liability the restaurant owes for outstanding gift certificates (Liability for Groupon Coupons).  Finally, we need a current asset account (Deferred Promotional Expenses) to keep track of the discounts that will be recorded when the certificates are redeemed.

Initial Setup

The easiest way to record the issuance of certificates is with a journal entry.  In this example, 100 certificates were issued with a face value of $100 each.  The customer paid $55 to Groupon (to get a $45 discount at the restaurant).  Groupon takes 50% of the $55/certificate, and charges HST on their fee.  Groupon cuts a cheque to the restaurant for the remaining proceeds from the sale of the certificates.  Here’s the entry to set everything up:

 

If you don’t understand the accounting entry, please refer to the article about how to account for Groupon.  This entry sets up the liability for Groupon certificates, the deferred promotional expense (or deferred sales discounts, if you like), the promotional expense (Groupon fee), records the HST (sales tax) on the Groupon fee, and deposits the cheque from Groupon.  One simple entry does it all!

 

Redemptions

I hope you’re already using a sales receipt for entering the daily restaurant sales.  While you could use a journal entry, I find the sales receipt method to be the easiest, and most logical, way to enter daily sales summaries.  Here’s a sample redemption:

 

You need to create three new items.  The GrouponDiscount (discount type) item posts to the Promotional Expense – Groupon account.  In this example, it is the difference between the face value and the promotional value (paid to Groupon by the customer) – $100 less $55 equals $45.  In Canada (and California), this discount is coded as taxable (the “H” code), so that the discount amount will be deducted from the other taxable items before calculating the tax.

The GrouponDeferred item is an other charge item that posts to the Deferred Promotional Expenses account.  As each certificate is redeemed, a portion of the deferred expense is transferred to the actual expense account.  Note that this line is coded as exempt from tax (“E”).

Finally, a GrouponPayment item is used to post to the Liability for Groupon Coupons account.  This line entry reduces the liability for outstanding certificates by the face amount of each certificate redeemed.  Note that this, too, is not taxable (it’s like cash).  Note also, the net of the GrouponPayment and the GrouponDeferred items is equal to the amount that the customer paid for the certificate.

In Canada there is a 13% HST tax on the promotional value of the certificate.  In this case, the promotional value is $55.  Here, I’m assuming the customer paid the tax with cash (which could be posted to the account of your liking).

 

Expiry Entry

Many Groupon certificates expire after a certain date.  In our example, I’m assuming that was six months after the date of issue.  At that point, the restaurant ceases to have any liability to the certificate holders (though Groupon may refund a portion).  Let’s assume that 10 certificates were never used.  We need an entry to clean up the accounts.  The easiest way to do this is to make a journal entry, as follows:

At the expiry date, the liability for outstanding certificates is $1,000.  The balance in the Deferred Promotional Expense account is $450.  We have to eliminate the balances in these two accounts.  The balancing item in the journal entry is to the Promotional Expense – Groupon account.  Note that it is a credit to an expense account, which represents a recovery of the promotional expense related to this batch of Groupon certificates.

The elimination of the Deferred Promotional Expenses represents the $45 portion of each certificate, and the recovery of promotional expenses represents the $55 portion.    Neither of these amounts will have to be “paid” by the restaurant with food and drink.

 

That’s all there is to it.  My final article on Groupon will examine whether it is a worthwhile promotion for restaurants, and if so, under which conditions.

 

Groupon POS Implications

This is the second article in a series about Groupon coupons for restaurants.  The first article covered accounting for Groupon transactions.  This piece covers how to set up your Point of Sale (POS) system to record redemptions of coupons.  Failing to do so properly could result in the restaurant being on the hook for a lot of sales tax, penalties and interest!

In the first article, we learned that HST applies to the “promotional value” of the Groupon coupon.  In our example, the coupon was worth $100 of meals, and the customer purchased it for $50, which was paid directly to Groupon.  The promotional value of the coupon is the $50, even though the restaurant does not receive this amount from Groupon.  So, when the customer orders $100 worth of meals and drinks at a restaurant, she will have to pay tax on $50, but she will receive a credit for $100 (face value of the coupon).

Restaurants that use Groupon (or other similar programs) may need to update their POS systems to properly account for these transactions.  Many POS systems can be easily modified by the user to make these changes, but some require programming by the developer (which can take time).  Here are the changes you will need.

Groupon Discount

In our example, we will need a discount key to deduct $50 from the customer’s bill, before tax.  This reduces the bill from $100 to $50.  Note that this reduces the customer’s bill to the amount that he or she paid for the coupon.  Now, the POS system will calculate sales tax(es) in the usual manner.  In Ontario’s case, the POS system will add $6.50 (13% HST) to the bill, leaving a balance of $56.50.  You may need to have another key that allows a dollar amount discount, determined at the time of sale, too.  This is because some customers won’t spend the full amount they are entitled to on the coupon.  For example, if a customer spent only $80 and redeemed the coupon, the discount to be applied would only be $30.

Groupon Coupon Payment

Now, we need to account for the other $50 that the coupon holder is owed.  The easiest way to do this is to create a Groupon (or Coupon) payment type.  Again, this may require programming, but many systems allow to you easily create this within the software.  Using a payment type, the customer’s bill will reflect a $50 reduction of the balance due.  Note that there is no tax reduction, just like there is no tax reduction when restaurants receive cash, Visa, MC, etc…

POS Reporting

You may need to update your day end summary reports to ensure that they pick up these new types of transactions (discount and payment type).  Also, you should make sure that you have the ability to create a report that shows Groupon discounts apart from other discounts.

It is useful to have the ability to print a report showing all Groupon redemptions (payment type), so that you can check it to the certificates that were initially issued.

Other Controls

The POS system only gets you part of the way to controlling and properly reporting your Groupon transactions.   You will also need to adjust your internal controls.  Specifically, you will need to create a policy about expired coupons.  Many restaurants simply refuse to accept any coupons that have expired.  In the case of Groupon coupons that is probably the best policy, because there is very little chance that these customers will ever return without a coupon.  Many restaurants will honour coupons and certificates that they have given to VIP customers or those that received the certificates at charity auctions, because these truly are good customers or potentially good customers.

Servers need to check for expired Groupon coupons every time they are redeemed.  You need to ensure that duplicated coupons are not accepted.  Servers need to be properly trained on how to enter discounts and Groupon payment types.

As we will see in a forthcoming article about tax implications of Groupon certificates, it is imperative that the restaurant keep all guest checks paid with Groupon certificates.

You need to make sure that your Groupon transactions are recorded in the accounts accurately, based on the concepts outlined in the first article.  I’ll be showing you how to do this in QuickBooks in a future article, too.

Accounting for Groupon Coupons

While I’m not a fan of Groupon coupons, at least for restaurants, I felt compelled to write a few articles about it.  Today’s piece covers accounting for Groupon coupons, because I’ve seen some really weird accounting recommendations and far-from-best-practices.  As far as I know, none of the more unusual accounting has been suggested by real accountants!

Future articles will cover how to generate the proper entries in QuickBooks, how to set up your Point of Sale (POS) system to properly account for redemptions of Groupon certificates, and why you may be in for a huge shock when the tax man comes a knocking.

For what it’s worth, if you really, really think you need to use Groupon (or Living Social) coupons at your restaurant, at least get the accounting right.  There are four types of entries that need to be made in your accounting system, which are:

1. Setting up the initial distribution of Groupon certificates,
2. Paying Groupon its fee or commission for selling the coupons,
3. Recording the redemptions of coupons by customers, and
4. Accounting for any remaining coupons that expire.

I’m going to take you through these transactions, using an example.  Here are the facts:

• RestaurantCo offers 100 Groupon certificates that provide $100 worth of meals/drinks for $50.
• Groupon charges RestaurantCo 25% of the face value, or $25 per certificate for marketing and administration
• Only 90% of the certificates are actually redeemed at RestaurantCo prior to the expiry date
• Groupon and RestaurantCo are registered for HST

Initial Distribution and Setup

RestaurantCo has promised to accept $10,000 worth of Groupon certificates.  This represents a liability owing to coupon holders.  Therefore, it needs to be set up as a current liability on the books of RestaurantCo.  Note that most of the recommendations by others on the internet and on Intuit’s communities (at least in the U.S.) fail to record the liability.  Instead, they show this as a sale!

Unfortunately, RestaurantCo doesn’t receive $10,000 for the coupons that are issued.  In fact, it receives $10,000, less the discount offered to customers ($100 – $50) x 100 certificates, or $5,000, less the commission paid to Groupon of $2,500 (plus HST of $325).  So, RestaurantCo receives a cheque for $2,175.

This is where it gets complicated (which is a code word for “interesting” to an accountant).  We do have to consider the tax implications of certificates that are redeemed.  In Canada, the Groupon certificates are considered to be gift certificates, for the purpose of determining whether GST/HST applies to any transactions.  The sale of gift certificates by RestaurantCo (and by Groupon) is not considered a taxable “supply” (or sale).  Therefore, there is no HST charged on the sale of the certificates.

However, when the certificates are redeemed by the customers, RestaurantCo is deemed to have received $50 (price paid by the customer to Groupon) for the $100 of meals received.  So, we have to keep track of the amount paid by the customers (to Groupon) for the certificates and we have to keep track of the face value of the certificates, because that is the value of meals that RestaurantCo owes to coupon holders.

Note that Groupon’s fee to RestaurantCo is a taxable sale!  Therefore, the journal entry to record the initial distribution of Groupon certificates is:

Note that Groupon’s fee is set up as a promotional expense and that $325 of HST has been paid on that amount.  The $5,000 Deferred Promotion Expense is the difference between the $10,000 face value of the coupons and the $5,000 paid by the customers, which will be taxable to RestaurantCo when the certificates are redeemed.  So far, there is no taxable sale by RestaurantCo, but because the Groupon fee is not refundable, it is expensed when the coupons are issued.  We could defer this item and expense it as the coupons are redeemed, but most coupons are redeemed in the same year as they are issued, so this method is simpler.

The above entry records steps 1 and 2 of the Groupon promotion.

Coupon Redemptions

When customers come into RestaurantCo and redeem their coupons for meals, we need to record these transactions in the accounts.  Each coupon redeemed will reduce the liability for outstanding gift certificates, by $100, and we need to recognize $50 of promotion (or discount) expense that we deferred during the initial setup.  Under Canadian law, we need to charge the customer HST on the net value of the meals sold.  In our case, the net sales value is equal to the amount paid by the customer for the Groupon coupon – $50.

Recall that only 90% of the coupons are redeemed, in our case.  The following journal entry records the redemption of 90 gift certificates, assuming the customers only purchased $100 worth of meals, each.

Note that RestaurantCo records $9,000 of revenue, which was paid for using 90 certificates.  HST is charged on $4,500, not $9,000, because that is the amount paid by the customers to Groupon.  RestaurantCo must charge and collect this amount from the customers.  The liability for certificates outstanding is reduced by $9,000, leaving a remaining balance of $1,000, made up of 10 unredeemed certificates.  Similarly, the deferred promotion expense is reduced by 90 x $50, or $4,500, leaving a balance of $500.  The reduction in deferred promotion expense is matched with an increase in the promotion expense.

I’ll cover this in more detail in a future article, but make sure you understand the calculation of HST on these types of transactions.  Note that HST is not charged on the regular menu prices of the items ordered.  Even though full menu prices are used to record the restaurant’s sales, tax is only charged on the amount net of the customer’s discount.  If you make the mistake and charge tax on the full menu prices (and treat the coupon’s face value like money), you will have over-charged your customer and you will be required to remit all of the amount collected to the CRA.  In other words, you don’t get to keep the over-charged tax!

At Expiry

Coupons don’t last forever.  RestaurantCo wants people to come in and try the restaurant as soon as possible.  So, the coupons issued are given a fairly short expiry date, after which they are worthless.  Given that RestaurantCo still has some certificates outstanding at the expiry date, we need to make a final journal entry to clear up the accounts.  We need to eliminate the remaining liability for certificates, because RestaurantCo no longer owes this amount to coupon holders.  We also need to deal with the remaining deferred promotion expense.  We need to record the following entry:

At this point, we have eliminated both the liability for certificates and the deferred promotion expense.  The credit to promotion expense is actually a recovery of promotion expense related to the Groupon promotion, because RestaurantCo saved $50 on each certificate that expired.

Seek Professional Advice

The example in this article was based on Canadian tax laws.  Other jurisdictions may have different policies regarding the sales and income tax treatment of Groupon style coupons.  If you are considering using Groupon or any other similar promotion, please seek the advice of a qualified tax professional, to make sure you are collecting and remitting the proper amount of tax on your sales.

How to Compare Your Restaurant

It is almost impossible to compare a restaurant’s operations with industry averages.  Organizations like the CRFA aggregate the smallest mom-and-pop with the largest chains to get their averages.  Not many restaurants are “average”, anyway.  Just about all industry statistics are based on surveys, not actual operating results.  Even though such surveys are anonymous, who wants to put down that their cost of sales is 40% or more?  So, the results are often skewed.

There is another way of compiling restaurant operating results.  Even though it isn’t perfect, I think it is better than the typical industry figures, because they are based on actual tax returns filed by restaurants.  I’m talking about the Statistics Canada, Small Business Profiles.  These figures are broken down by NAICS industry classification, and they show operating results for each quartile (based on revenue).  They also show summary results (sales, expenses, net profit) for each quartile’s profitable restaurants and for non-profitable restaurants.

I looked at the figures for Ontario Full Service Restaurants.  After reclassifying and merging some expenses, I came up with the following pie chart that shows the percentage for each major expense category.  This chart shows the results for the Top 25% of all restaurants:

Here are a few facts about this Top 25% group of full service restaurants.  Their revenues ranged from $733,000 to $5.0 million, with the average being $1,570,000.

The average profit was only $33,300 or 2.1%!  Among the profitable restaurants, the average profit was $78,700 on sales of $1,615,000, or 4.9%.  For those that lost money, the average loss was $69,800 on sales of $1,466,000, or minus 4.8%.  Clearly, size is no guarantee of success.

The Top 25% segment is the only one that was profitable.  The Upper-Middle 25% were, on average, only breaking even.  All that work with nothing to show for it!

The cost of sales percentage is higher than those for smaller restaurants (not presented here).  Undoubtedly, the reason is higher wine sales and more sales of high price items, such as steaks or rack of lamb, which have higher costs of sales percentages.

These restaurants also have high labour costs relative to the smaller restaurants, undoubtedly a reflection of more management and additional staff for hostesses, bus boys/runners and sommeliers.

Occupancy costs still look a bit high to me, at 13.5%, but they are a significantly lower percentage of sales than is the case for smaller restaurants.  The smaller the restaurant, the higher the occupancy costs as a percentage of sales.   This is often the killer of small restaurant operations.  They are unable to generate sufficient sales to cover their fixed costs.

Larger, more successful restaurants spend almost twice as much as smaller restaurants on advertising and promotion.  Perhaps smaller restaurants should take note of this!

I have only presented the chart for the Top 25% of Ontario full service restaurants.  I’ve included the other quartile charts on my website along with additional commentary.

The take-away from this is that all restaurants need to generate sufficient revenues so that their fixed costs are not taking up too large a percentage of sales.  Often this will mean that a greater investment in advertising and promotion is warranted.  It’s still a game of percentages.  Small improvements in cost control can be the difference between profitability and closing your doors.

Restaurant Fraud & Theft – Part IV

The first three posts in this series covered fraud and theft of products entering the establishment, food theft, and alcohol theft.  Now, we’re going to look at outright theft of sales receipts.  While it’s unlikely that your servers are grabbing handfuls of dollars on their way out the door, today’s post looks at several more sophisticated methods of achieving the same result.

Many restaurants offer discounts to their guests once in a while.  Usually, these discounts are in the form of customer “comps” or “treats”.  Sometimes, customers or potential customers are given coupons to be redeemed for discounts.  Used properly, there’s nothing wrong with this practice to generate new business and reward loyal customers, but in the wrong hands, it’s the equivalent of handing out cash!

PRINTING MONEY

If you mail or deliver coupons to your potential customers, they receive the coupons, directly.  Giving out coupons in the guest check folder, at the front desk, or printed on a business card, makes them available to anyone, including your staff.  Not only can servers use these coupons to steal cash, they can give coupons to their otherwise full-paying, “regular” customers in return for a higher tip.  Unless your establishment has very strong supervisory controls, you must issue coupons directly to your customers or potential customers.

If coupons are used in your establishment, you must maintain control over all redemptions.  When a guest uses a coupon, the server must submit the coupon with the guest check to support the discount applied to the bill.  This helps prevent giving discounts that are not supported with a coupon, but what about supported discounts that really shouldn’t have been allowed?  If servers have a supply of non-personalized coupons, they can be used to “support” discounts on guest checks.  It’s difficult for a server to improperly use a coupon on a guest check paid by a credit card, unless there is collusion with the guest.

The real risk is with cash paid guest checks.  A guest, without a coupon, pays the full amount of the check.  After the guest leaves, the server attaches a coupon and enters the discount in the POS.  The server pockets the amount of the discount plus the taxes that were paid on the discount by the customer.  It may be possible to detect this type of theft, after the fact, by examining server cash paid checks.  If a server has a significantly higher percentage of coupons applied to cash checks than charge checks, you can be pretty sure this type of theft is being perpetrated. 

To catch this fraud before it happens, you’ll have to closely observe your servers as they present guest checks to customers, collect payments, and close out checks on the POS system.  You’ll be looking for checks paid in cash without discount coupons.  For these you want to make sure the check is closed out at the time of the customer payment and that no coupon discount is applied.  If servers fail to close out cash-paid checks promptly, there is a risk that the server will apply coupons later in the shift, pocketing the cash.

Many restaurants provide complimentary dinners for charities.  Rather than providing certificates with a set value, most provide letters and/or paper certificates that entitle the guest to “Dinner for Two” or something similar.  The manager should authorize all charitable donation discounts entered in the POS system, to ensure that only valid discounts are processed.  Once used, the certificates should be cancelled to prevent reuse.  Never allow staff to issue charitable donation certificates without management authorization.

RE-GIFTING

Too many restaurants still use paper gift certificates.  GroupOn and other similar companies issue gift certificates that are printed from the purchaser’s computer.  No matter how sophisticated the design, they are easily copied, to be used by others.  Dishonest staff or customers can systematically redeem fraudulent gift certificates.  By the time the fraud is detected, it is too late.

Sometimes, servers don’t even need to copy the certificates, they’re available on site.  Management must maintain control over all gift certificates, otherwise staff may gain access to them and present them as valid certificates.  It is good practice to cancel all certificates after redemption, to prevent unauthorized re-use.  A log should be used to record purchases and redemptions of gift certificates.

The best defense is the use of magnetic strip gift cards.  Ideally, these should be processed through your credit card authorization system, as offered by Moneris and others.  These systems provide better control over the issuance and redemption of gift cards. 

CHECK AND RE-CHECK

Even without a zapper cash can be skimmed from sales – the old fashioned way.  Letting servers and bartenders keep tables open after the check has been paid in cash invites fraud.  There are several variations on this one, but the most common one is to reuse a cash paid guest check with another table later in the shift.  Modern POS systems make it quite easy to split bills, allowing the dishonest server to split items on a cash paid table, into several cash checks each with an individual item, and transfer them to new tables.  Then, it is just a matter of finding another customer to purchase the previously rung in (and paid for) items.  This type of theft works well in a busy bar situation.

Well-run restaurants require manager approval for transferring items from one table to another. 

NOW YOU SEE IT…

A dishonest server collects cash to settle a guest check, claims the guests pulled a “Dine-and-Dash”, and tries to get management to cancel the entire bill.  Another variation is to claim that the customer complained about an item ordered (or the service) and use this to justify discounting or voiding items off the guest check.  Once again, if the check is paid with cash, the void can be performed after the guest pays, and the server keeps the difference.

The lessons, here, are to supervise staff to ensure all settled tables are closed promptly and never allow service staff to use discount and void keys without authorization.  Even though it is not lawful to hold servers financially responsible for walk-outs, most restaurants make their servers “know” that they will be held responsible, as a method of minimizing this type of fraud.

FINAL THOUGHTS

This concludes the current series on fraud and theft in restaurants.  Obviously, I have not discussed every tactic employed by dishonest suppliers, customers and employees.  I have tried to outline the more significant thefts and how to minimize their impact on your restaurant.  Not only is theft costly in terms of inventory “shrinkage”, it is the number one cause of assessments for “unreported sales” arising from tax audits.  If more restaurateurs knew this, they would devote more time and effort to minimizing the incidence of fraud and theft in their operations.

Restaurant Fraud & Theft – Part III

“What I like to drink most is wine that belongs to others.”
Diogenes.

Today’s post looks at alcohol related thefts once the alcohol has made its way to the coolers and shelves in the bar.  These types of alcohol theft are broad categories.  Within each there are many scams, too many to list.  As I have discussed many times on this blog and my tax blog, alcohol theft has dire tax consequences for a restaurant.  In Canada, the total cost of the theft can easily be twice the cost of the stolen alcohol.  That’s why it is so important to minimize theft in your operation.

On The Job Stress Relief

From another study, as many as 56.6% of your employees are drinking your alcohol without authorization.  On average, half of your employees are stealing alcoholic drinks from your restaurant or bar.  If there is inadequate supervision of staff during the shift, alcohol will disappear.  A water glass filled with vodka or a glass of wine served in a tea cup will not appear out of the ordinary.  A Cuba Libra looks like a Coke.  The only way you can catch these types of theft is to properly observe bar staff during all shifts.

It’s a Party!

Many restaurateurs have allowed their staff to drink after hours, at least once in a while.   Others allow their staff to drink after hours on a regular basis.  Rarely are staff charged for these drinks.  You might think that it is okay, as long as the owner is on hand to monitor drinking.  You would be wrong.  It isn’t just the cost of the alcohol consumed (or the tax liability that accrues), it is the effect of this policy on employee theft.

If you allow staff drinking after hours, there is a significant increase in employee theft from giving away alcohol to friends, customers and staff at other establishments (who will return the favour to them in the future).  Suffice it to say that almost every one of your employees will give-to-get alcohol (9 of 10).

If you do allow staff drinking after hours, stop.  If you wish to treat your staff, take them off-premises.

It’s On Me

About 2/3 of your employees will give free drinks to their friends.  You know, “it’s on me.”  Actually, it’s on you, the restaurateur.

While it is good practice to “treat” your best customers to free drinks every once in a while, it is equally important to keep track of these treats.  Even if you agree with your staff’s treats to customers, they must be supported in the event of a tax audit.  If your staff is simply giving away free drinks without recording them, you will be unable to prove the amount of customer promotions, leading to a significant tax liability.  Without any record of the “treats”, it is impossible to control your alcohol costs, making it impossible to monitor alcohol theft.  It really is worth the paperwork.

About half of your employees are guilty of over-pouring drinks to friends and regulars.  Over-pouring adds up over time and has a significant cost to the owner in terms of the cost of alcohol and tax liabilities.  In a way, it is even worse than giving away drinks.  At least customer comps can be documented for tax purposes.  It is difficult to prove over-pouring during a tax audit.  To put this in perspective, a 1.0 oz. over-pour on a 6.0 oz. glass of wine increases the serving cost of the wine by 16.67% .  A 1/4 oz. over-pour on a 1.0 oz. shot of liquor represents a 25% jump in alcohol costs! 

Keep in mind that when your staff over-pour drinks, your customers will order fewer drinks during the stay.  Customers that receive free drinks order fewer drinks too.  This means lower sales to the restaurant, and a potentially large tax bill down the road.   All these costs, so that your staff can make a few dollars of additional gratuities.  These are the most expensive gratuities ever “earned”.  It would be far cheaper to simply hand over the equivalent cash to your servers and bartenders!

If you don’t already maintain a log of customer comps (“treats”), start doing so.  Ideally, enter every order into the POS, print the guest check and discount the bill to a promotion account.  Maintain a log of the customer comps to indicate the customer, reason for the complimentary drink, date and authorization.  Keep all promo guest checks with the monthly log.

Properly train all serving staff on drink sizes.  Make sure proper measuring devices are available.  Monitor portion controls through effective supervision.