Should a bar take a supplier's bulk discount?
How a bar or restaurant weighs a supplier's bulk discount on drinks against storage, spoilage, theft and cash, and how to record and approve the order.
By Achekam · · 5 min read · For Hospitality businesses in South Africa, Nigeria, Kenya
The beverage rep is persuasive. Take a full pallet of the house lager instead of the usual few cases, and the price per case drops. Order spirits by the quarter instead of by the week, and there is a better rate again. On paper the saving is obvious, and the bar manager is tempted to sign on the spot.
What the rep's price sheet does not show is the cost on the other side: the storeroom that is already full, the cash that will sit in cases on the floor for months, the bottles that go missing or past their best before they are sold. A bulk discount is a good deal only if the saving is bigger than those costs. This article shows how a bar, restaurant or hotel in South Africa, Nigeria or Kenya can weigh the two properly, and how to record and approve the order once the decision is made.
What the discount saves and what it costs
ACCA lists the advantages of holding inventory as meeting customer demand, taking bulk discounts and reducing the total cost of re-ordering over the year. It lists the disadvantages as storage costs, the cost of capital tied up, and deterioration, obsolescence and theft.
A bulk order buys the first set of benefits: a lower price, fewer deliveries to receive and check, and less chance of running out on a busy night. It also brings the second set: more space used, more cash locked up, and more stock exposed to spoiling or disappearing. Both sides are real costs; the decision is about which is larger.
Comparing total yearly cost at both order sizes
ACCA explains that to evaluate a bulk discount, total annual cost should be compared at the normal economic order quantity and at the order level where the discount becomes available. Total annual cost has three parts:
- Purchasing cost: the price per case multiplied by the cases you will use in a year.
- Re-ordering cost: the cost of each order, from staff time to delivery charges, multiplied by the number of orders in the year.
- Holding cost: the cost of keeping stock on hand, including storage, the cash tied up and losses, applied to the average stock you hold.
A worked example in words. At the usual order size, the bar pays the normal price, places an order every week and holds little stock. At the bulk size, it pays the discounted price and places far fewer orders, but its average stock is much higher, so holding cost rises. Add up the three parts at each size. If the bulk total is lower, the discount pays; if it is higher, the saving on price has been eaten by the cost of holding.
ACCA adds a practical test: whether the larger orders can actually be stored. If the bulk order needs space you do not have, the comparison ends there.
There is a limit to the textbook tools as well. Investopedia notes that the economic order quantity model assumes constant demand and constant ordering and holding costs, so it cannot account for changing demand, seasonal cost changes, lost sales from shortages or discounts for buying in larger quantities. A bar's demand is anything but constant across a year, so treat the numbers as a guide and add judgement for the season ahead. The ACCA article on stock control works through order quantities, re-order levels and how to evaluate a bulk discount.
Space, spoilage and theft
In a bar, holding costs are not abstract:
- Space. Cases stacked in a corridor are a fire and safety problem, and cases in the cold room displace food.
- Spoilage. Draught kegs, wine and some mixers have limited lives; a bulk order of a slow-moving line can still be on the shelf when it should have been sold.
- Theft. More stock in the storeroom, counted less often, is easier to lose without noticing. How far to separate ordering from receiving deliveries is covered in why the kitchen buyer shouldn't receive the delivery.
Cash tied up on the shelf
ICAEW explains that understocking improves cash flow but risks stock not being available to meet customer demand, while overstocking can tie up cash in stock that may become obsolete or go out of date. Every case on the storeroom floor is cash that cannot pay wages, rent or the next supplier.
So before accepting a bulk deal, look at the payment terms as well as the price. A discount that must be paid on delivery, for stock that will take months to sell, has a very different effect on cash from the same discount on generous terms. The same trade-off appears in other industries; see what it costs a provider to hold spare routers.
Recording quotes and approving the order in Achekam
Once you have decided, the purchase should go through the same controls as any other.
Quotes. Supplier quotations are captured against a requisition and one is selected. Choosing a quotation that is not the cheapest needs a written reason that is kept, and a quotation can also be disqualified with a reason. That suits a bulk-discount decision: if you choose the normal order size over a cheaper-per-case bulk quote, record why, for example limited cold-room space.
The order. A purchase order is raised from the selected quotation of an approved requisition. The person who raised it cannot approve it, and an approved order can be cancelled with a reason.
The budget. Approved purchase orders count as committed spend against budgets per expense account and period. The screen shows budget, spent, committed and available, and flags over-committed lines without blocking the purchase. A large bulk order will show up as a big commitment in the month it is approved, which is exactly what the owner needs to see before it is placed. Paying the resulting bill in instalments is covered in paying food and beverage suppliers in parts.
Before you sign
Ask the supplier for both quotes in writing: the normal order size and the bulk size. Estimate how long the bulk order will take to sell, where it will be stored and what it ties up in cash. Compare total yearly cost at both sizes, decide, and record the reason with the quotes.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
