SR-308-002-02 (15)
(0-1-
MAY - 9 1989
CM:JG
Santa Monica, California
May 9, 1989
TO:
Mayor and City Council
FROM:
City Staff
SUBJECT:
Recommendation to Authorize City Manager to
Negotiate and Execute Modification to Beach
Concession contract
INTRODUCTION
The following recommends that the city Council authorize the City
Manager to negotiate and execute a modification to the beach
concession contract with Pizza Works, Inc. based on operating
constraints encountered by the company during its first full year
of operation.
BACKGROUND
Following the withdrawal of McDonald's from their contract to
operate the City's five beach concession stands in early 1987,
the city issued a Request for Proposal (RFP) in April of 1987 for
the future operation of the concession stands. Five proposals
were received in response to the RFP. Based on their
presentation of the most attractive monetary proposal as well as
compliance with the other requirements of the RFP, staff further
evaluated the Pizza Works proposal and recommended that the
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council award the five stands to Pizza Works on September 8,
1987.
The payment schedule for the minimum fixed rent negotiated with
Pizza Works as part of their contract to operate the five
concession stands specified five equal monthly installments of
$32,140 due on the tenth day of June, July, August, September and
October, bringing the total annual rental due to the city to
$160,700.
DISCUSSION
In October of 1988, the city contacted Pizza Works regarding
their overdue fifth and final payment for the year. At that
time, based on their lower than projected sales for the beach
season, Pizza Works indicated that they were financially unable
to make the payment and asked the City to consider a
modification to the terms of their contract related to the annual
rental payment.
In their request, Pizza Works cited several mitigating factors
which impacted their sales revenue for the season. First, due to
the substantial modifications required to prepare the concession
stand interiors for the company's operation, Pizza Works was not
able to open all five stands until June 15th, resulting in their
inability to capitalize on the profitable Memorial Day holiday
beach turnout. Second, relatively cool summer weather during
1988 resulted in the company's failure to meet its projected
sales targets.
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At the time of Pizza Works' request for a contract modification,
the city decided to engage the services of Peat Marwick Main &
co., certified public accountants, to conduct a thorough review
of the Pizza Works operation and to make recommendations to the
city regarding areas in need of operational improvements as well
as the advisability of negotiating a rental payment reduction.
AUDIT RESULTS
The analysis performed by Peat Marwick Main & Co. indicated that,
overall, Pizza Works had operated efficiently during the summer
of 1988. Payroll, direct operating expenses, advertising and
promotion, utilities, administrative and general expenses, and
repair and maintenance cost ratios were all well within industry
operating standards.
The auditors noted, however, that Pizza Work's projected income
during 1988 was significantly below predictions, resulting in an
a rental cost figure which was 31.9% of income, a very high
percentage by indnstry standards. Unseasonably cool weather
during the summer months was cited as the primary reason why
Pizza Work's sales failed to meet projections.
PROJECTIONS FOR 1989
Pizza Works projected sales for 1989 is as follows:
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Food
Rentals
$495,000
68,000
$563,000
Given these projected minimum sales figures, Peat Marwick Main &
Co. indicate that a modified annual rental payment totalling 22%
of sales revenue would be a much more reasonable percentage by
industry standards. Thus, City staff is recommending that the
annual minimum rental payment due the City from Pizza Works for
1989 be revised downward to $120,000. Should the gross sales
exceed the minimum projected above, rental due to the City would
be based on 24% of gross sales rather than the fixed minimum rate
of $120,000.
Based on a a projected 7% increase in gross sales over the next
four years, staff is recommending modification of the fixed rent
schedule as follows:
1989
1990
1991
1992
$120,000
120,000
132,000
143,000
In addition, the overdue fifth rental payment for 1988 would be
repaid over the next four years as follows:
1989
1990
$ 5,000
5,000
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1991
1992
5,000
17,140
City staff also recommends that at the end of 1989 a second
performance assessment of Pizza Works be carried out to insure
that the new contract terms are being met.
City staff feels it is in the best interests of the City to
modify the contract with Pizza Works as outlined above rather
than to rebid the operation of the beach concession stands.
First, it should be noted that, of the other four proposals
received for the operations of the stands at the time the RFP was
issued, none of the four proposed annual rental paYments to the
City exceeding $105,000. Second, staff feels that, given
experience gained during the first year, Pizza Works will be in a
better sales operation position in 1989 and can be expected to
perform at a more profitable level. Finally the company has made
a significant investment in the city's concession stand operation
and offers a diverse and appealing menu. Overall, the City has
been satisfied with the quality of service they provide to the
beach going public.
BUDGET/FINANCIAL IMPACT
The modification of the annual rental paYment as outlined above
will result in $120,420 in beach fund revenue for FY 1988/89 and
$125,000 for FY 1989/90.
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RECOMMENDATION
City staff recommends that the city Council authorize the City
Manager to negotiate and execute a modification to the Pizza
Works contract for the operation of the five beach concession
stands resulting in a revision in the annual rental paYment due
to the city.
Prepared by:
Lynne C. Barrette, Assistant City Manager
Barbara Franklin-Moran, Director, Cultural and
Recreation Services Department
Dodie Mosby, Business Administrator
Julia N. Griffin, Senior Management Analyst
(pwamend)
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