SR-308-002-02 (16)
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City Council Meeting:
March 13, 1990
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Santa Monica, California '\
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STAFF REPORT
TO:
Mayor and City Council
FROM:
City Staff
SUBJECT:
RECOMMENDATION TO AUTHORIZE CITY MANAGER TO NEGOTIATE
AND EXECUTE MODIFICATION TO BEACH CONCESSION AGREEMENT
INTRODUCTION
The following recommends that the City Council authorize the City
Manager to negotiate and execute a modification to the beach
concession agreement with Pizza Works, Inc., based on continued
operating constraints faced by the company.
BACKGROUND
Following the withdrawal of McDonald's in 1987 from their
contract to operate the City's five beach concession stands, the
City issued a Request for Proposal for future operation in April
1987. Five proposals were received and, after a careful analysis
by Peat, Marwick & Main, a five-year contract was awarded to
Pizza Works, Inc., from February 11, 1988, through February 10,
1993.
The original contract called for a yearly payment of $160,700 or
22 percent of gross sales, whichever was greater. The payment
schedule of $160,700 was divided into five equal payments of
$32,140 due in June, July, August, September, and October. At
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the end of the first year, the contractor defaulted on the fifth
payment. At that time, further analysis of Pizza Works'
financial records, operating procedures, etc., was conducted by
Peat, Marwick & Main. Based on their findings, it was determined
that the minimum annual payment schedule of $160,700 was
burdensome given the then prevailing market conditions for food
and beverage service on the beach. Factors impacting Pizza
Works' financial performance included a late start up, bad
weather, and pollution warnings for the bay, as well as the
general decline in beach attendance over the past several
seasons.
Based on the Peat, Marwick & Main study, as well as study and
review by Staff, it was determined that the minimum annual
payment should be reduced to $120,000 for 1989 and 1990 with
incremental increases for 1991 and 1992. However, it was further
agreed that a good faith effort on the part of the concessionaire
to correct the first year's defaulted payment should be included
in the contract modification, resulting in additional payments of
$5,000 annually for 1989, 1990, and 1991, and a final payment of
$17,140 in 1992.
However, during the second year of operation, the concessionaire
once again, faced with similar mitigating factors encountered in
the first year, defaulted on the fifth payment. Because of this,
the concessionaire has requested a further reduction in the
minimum annual payment from $120,000 to $100,001 or 20 percent of
gross sales, whichever is greater. The concessionaire has also
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requested that the City eliminate the payment schedule for the
fifth payment due from the first year.
DISCUSSION
Start-up costs, which included interior remodeling estimated at
$125,000, actually approached $250,000 resulting in annual
equipment payment costs of $60,000 in addition to operating
expenses.
In addition, the concessionaire anticipated gross
revenues of a minimum of $550,000 to $800,000 per year. The
actual gross revenue for 1988 was $437,000 and for 1989 was
$450,000.
Balanced against expenses the first year, the $128,560 paid by
the concessionaire represented 29.5 percent of gross, which is
extremely high rent based on industry standards.
The modified agreement, which began during the second year of
operation, reduced the annual rent to $120,000 for 1989 and 1990,
$132,000 for 1991 and $143,000 for 1992 or 24 percent of gross,
whichever was greater.
In addition, a payment schedule was
established for the fifth payment from 1988 as follows:
1989, 1990, 1991: 1992:
July $ 1,250 July $ 4,285
August 1,250 August 4,285
September 1,250 September 4,285
October 1,250 October 4,285
Total $ 5,000 Total $17,140
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The current year's payments of $110,900 balanced against gross
revenues amount to 24.7 percent, which is still high by industry
standards.
A review of current contracts for food and beverage concessions
by other beach cities revealed the following differences:
Los Angeles County has a contract with Fidler Enterprises, Inc.
to operate eight concession stands from Zuma Beach to Torrance.
Minimum annual payment to the County is $100,000 or 18 percent of
gross sales, whichever is greater. Last year's gross was
$450,000. At 18 percent of gross, the annual payment would have
been $81,000.
The City of San Diego has converted from mobile pushcarts to
twelve locations at permanent sites. The minimum payment per
location is $500 each or 14 percent of gross, whichever is
greater. The minimum payment for all twelve is $6,000 annually.
The City of San Clemente has three locations for food and
beverage service. They each gross between $65,000 and $100,000
per year, with an annual payment of 13 percent of gross. The
payments range from $8,450 to $13,000 per site annually.
The City of Santa Barbara has three pushcart locations on the
beach for food and beverage service. All three pay 10 percent of
gross sales in payment. Two of the sites annually pay between
$6,500 and $8,500 per year. The third site pays $1,500 per year.
Based on the above rates for food and beverage service, the City
of Santa Monica makes more revenue even with the further
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reduction to $100,001 annually. In addition, the next highest
bidder two years ago had bid $100,000 for the five-stand
operation. However, given the track record of both McDonald's
and Pizza Works, Inc., it remains to be seen if there are future
prospective bidders for this contract when it expires in February
of 1993.
In making recommendation for a further modification to the
existing contract, several factors must also be considered:
1. Given the $60,000 annual equipment payment costs, in addition
to the minimum annual $100,000 payment, the contractor is
unable to assume the additional burden of the first year's
defaul ted payment schedule of $5,000 in 1990 and 1991 and
$17,140 in 1992;
2. The contractor will be paying the remainder of the late
October 1989 payment in installments of $7,000 in April and
May;
3. The current contractor has always provided a good quality
product in a clean environment, and the City has received no
complaints regarding the food or food service;
4. Given the current time frame for summer start-up, a new RFP
could not be issued in time to obtain a new contractor in a
timely fashion for the coming summer season;
5. The last two years' sales records further substantiate the
need to reduce the minimum annual payment based on
payment/gross sales ratios;
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6. Peat, Marwick & Main recognize the rent payment as being high
compared to industry standards yet feel the current
contractor has sound management/business practices;
7. The current contractor is committed to being a successful
concessionaire and wants the City's support in establishing a
payment schedule that is workable, reasonable, and practical
for both;
8. The current contract calls for reimbursement of trash pick-up
fees. Due to delinquencies, however, the City has refrained
from doing so. Based on the reductions being proposed, it is
recommended that the contractor assume these costs.
BUDGETARY/FINANCIAL IMPACT
The proposed rate reduction will result in a loss of $20,000
annual revenue to the beach fund, in addition to the loss of the
$5,000 payment towards the first year's final payment.
RECOMMENDATION
staff recommends that the city Council authorize the City Manager
to negotiate and execute the following contract modifications:
1. Reduction in the minimum annual payment to $100,001 for the
remainder of the contract, or 20 percent of gross sales,
whichever is greater, for 1990, 1991, and 1992;
2. Elimination of the payment schedule for the remaining fifth
payment from the first year;
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3. Assumption of the trash removal costs by the contractor.
Prepared by: Barbara Franklin-Moran, Director
Cultural and Recreation Services
Dodie Mosby
Business Administrator
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