HomeMy WebLinkAbout2011_11_15 CC PKT
Brookings City Council
Special Meeting
Tuesday, November 15, 2011
5:00 p.m.
City Hall Council Chambers
311 Third Avenue
The City of Brookings is committed to providing a high quality of life for its citizens and fostering a
diverse economic base through innovative thinking, strategic planning, and proactive, fiscally
responsible municipal management.
1. Call to order.
2. Discussion regarding Brookings Municipal Liquor Store
3. Adjourn.
If you require assistance, alternative formats, and/or accessible locations consistent with the Americans with Disabilities Act,
please contact Shari Thornes, City ADA Coordinator, at 692-6281 at least 3 working days prior to the meeting.
City of Brookings
November 15, 2011
2. Discussion regarding Brookings Municipal Liquor Store
TO: Mayor and City Council Members
FROM: City Manager Jeff Weldon
RE: Information pertaining to Brookings Municipal Liquor Store
During the September 27th Council meeting work session, you directed staff to assemble some
information pertaining to options for management and operations. Attached are the minutes
from that work session discussion as a reminder.
Models of Operation
A central theme which seemed to be the genesis of this issue has to do with the various
governance and management options of an off-sale liquor enterprise in the community. Also
attached is the report commissioned by the City Council in 2003 “Review of Brookings
Municipal Liquor Store” by Lyndon M. Griffin. Section IV, Options and Recommendations (C)
Privatization on pages 11-14 provide information and analysis pertaining to the various options
other than municipal operations. Generally, the various options of governance are as follows:
1) Sell the operation and issue an exclusive off-sale license to one private operator.
2) Sell the operation and issue multiple off-sale licenses to as many operators as the
Council deems appropriate.
3) Retain ownership of the operation and turn over operations through a management
agreement to a private operator with a payment to the City prescribed through a
manner, method, or formula specified in the contract.
4) If the Council wishes to increase the number of locations, additional municipal off-
sale stores could be developed.
5) When the current lease expires, do not renew the lease but instead build/own a
new municipal store at a different location.
6) Continue to operate our own municipal off-sale, but also issue private off-sale
licenses.
7) Change nothing; maintain the status quo.
Page 19 provided a recommendation of retaining the municipal operation model and suggested
a new location and operational changes to increase profitability by adjusting gross profit
margins.
“. . . The operation is very stable and well managed regarding all operating expenses.
Substantial additional profits can be attained by adjusting gross profit margins and/or
relocating to an expanded facility in a high traffic flow site and consumer visibility.
There appears to be no significant financial reason to sell the business or subrogate to a
management contract. The City would greatly benefit from maximizing the success of
the current operation. Continuing city operation of the store appears to be the best
way to insure the City‟s „control‟ responsibility of avoiding sales to minors and/or
intoxicated persons.”
City of Brookings
November 15, 2011
If the City Council wishes to return to the consideration of the options of ownership/operation
models, the descriptions in Section IV are instructive.
The strength of a chain liquor store, such as Surdyk‟s or MGM Liquor Warehouse, provides
higher name recognition, and I am unaware if they would look at a market this small. Typically,
such chains will require larger, metropolitan areas. Even so, such chains typically send their
profits to their headquarters and are not reinvested where they are earned.
Cost of owning property for a municipal liquor store
Following the Griffin report, the City Council subsequently entered into a lease at the
Brookings Mall for 12,500 square feet of retail space and moved the store. The 10-year lease
expires in 2016 with an option to renew for a five-year term with the identical terms and
conditions. The first year lease cost was $76,000, and it contains an escalator of two percent
per year. By the end of the initial 10-year term, the lease will cost $744,412 after some rebate
adjustments. We pay our own utilities, but the parking lot is included in the rent. We also
have common area maintenance (CAM) costs in addition to the rent which can vary slightly
from year to year and are standard for retail rental in malls. We used the net sales proceeds
from the sale of the old store to generate approximately $300,000 to invest in leasehold
improvements, furnishings, fixtures, and equipment outfitting the new store. The assertion was
also previously raised that as much as $500,000 of General Fund was used for improvements to
the new store. This is not correct. No General Fund revenue has been used to pay for any
portion of the new store.
Alternatively, if we were to replace the rental store with an owned facility, we can expect to
have approximately $100 per square foot in construction costs for commercial space. To
duplicate an owned facility with 12,500 square feet would cost just over $2 million for basic
construction, fees, contingency, furnishings, fixtures, and equipment but excluding land, utilities,
and site work.
Cost Accounting Charge to Override Operation
The liquor budget contains a line-item cost charged against the override part of the operation
in the amount of $40,000 per year. This is the only cost charged against this revenue stream.
The purpose is to charge to the override revenue the cost of financial administration of the
override by the various staff who process the override. Managing the override is a detailed
financial and time-consuming process and true cost accounting practices dictate that costs
incurred as a result of managing this service be charged against that service. This amount was
established several years ago as a result of an estimated time management study, and the
amount has never been adjusted. This charge means the override pays its fair share and is not
unduly subsidized by the Retail side of the liquor operation.
As a result of this issue being questioned, staff has undertaken another time management study.
The following are salary/benefit costs of various employees associated with accounting for the
override:
1. Liquor store clerks per week $ 84.35
2. Finance Accounting Clerk per week $ 55.44
City of Brookings
November 15, 2011
3. Liquor Store Accountant per week $666.88
4. Liquor Store Manager per week $ 81.88
TOTAL $888.55
X 52 weeks
$46,204.60 per year
In order to have an accounting system with sufficient internal controls, several employees are
utilized for cross-checking and verification of the process. In order to effectively account for
the true cost of processing the override, the retail should be charging the override an additional
$6,204 per year beyond what is currently charged.
Operational Transfers
The attached chart indicates the history of the transfers from the liquor operation to other
funds. The transfers have greatly helped supplement the General Fund with an alternative
revenue stream aiding in general operations of the City. The transfer has also assisted with
providing capital loans to the golf course for new mowers and the Street Department for a
grader replacement. The transfer also helps with cash flow for the golf course operations; a
subsidy which otherwise would be necessary from the General Fund. Liquor store transfers
can be viewed as a „shareholder dividend‟ being paid back to the owners since it is a
reinvestment in other City operations and services. The transfer comes from both the
Override and Retail sides of the operation.
For 2012, the total net profit from the override and retail operation was $828,326 of which 43
percent was generated from the retail operation and 57 percent was generated from the
override; and made a combined transfer of $500,000. For 2011 and 2012, the transfers are
$700,000 and $725,000 respectively. If we do not have a municipal retail operation, we lose
that 43 percent transfer, or $215,000, $301,000, and $311,750 respectively. If we change our
governance structure in favor of a private arrangement, we need to determine a method to
replace this revenue stream as the General Fund is heavily dependent upon it. Wholesale
purchases by a private off-sale store would also pay the override, so there would be a revenue
increase from this. Whether or not the replacement override from private off-sale stores
would be more or less than the net profit from a municipal off-sale is speculative, at best.
Profit Goal Established and Attained
The City Council established a profit goal of eight percent on net sales from the retail
operation. Historically, profitability at this level had been sluggish at the old store, which was
one of the reasons the Council re-evaluated the operation which precipitated the Griffin Study.
After the re-location, profitability began to improve with the new location, but marketing,
customer acclimation to a new location, and „ramp-up‟ to a certain degree, suppressed
profitability as is to be expected with such changes. Upon immediately being given this
profitability goal from the City Council, we instituted some operational changes to reduce
expenditures and increase revenue. Within three quarters, the goal of eight percent net profit
was realized and has been there ever since. Our highest quarter was 2009 fourth quarter when
our net profit was 12.63 percent. This goal was met in the face of increased wine licenses
issued to other retailers thus increasing competition. I am convinced our net profit would be
even higher if we had not approved private wine licenses. Some of those operational changes
City of Brookings
November 15, 2011
included: increased and more aggressive marketing and advertising; reducing staffing by
downgrading the Assistant Manager position to a Head Sales Clerk position; not filling a vacant
sales clerk position via attrition; more efficient staffing and scheduling; increasing store hours on
Sundays; more effective promotion of sales and specials; and perhaps most importantly,
implementing industry standards for inventory pricing.
Because of these operational changes, we now have more net sales revenue from the retail
operation than we would likely have if we were to charge the same level of purchases to a
private store through the override.
Industry Standards for Certain Operational Benchmarks
In addition to net profit, there are other metrics that should be examined.
The Griffin Study suggests the industry standard for gross profit of retail stores should be at 25
percent (p.3). At the old store, the gross profit was 19 percent as noted in the study. For
2010, the current store was at 25.28 percent.
The Griffin Study also suggests advertising be budgeted at one percent of gross sales (p.4). For
2010, we spent $25,000 on $3,626,713 of gross sales which is exactly one percent. For 2011,
we budgeted $30,000 in advertising.
The Griffin Study further suggests employee cost ratio as a percentage of sales should not
exceed 10 percent (p.4). For 2010, our personnel costs exceeded this target level at only nine
percent. For year-to-date 2011, we are running at exactly 10 percent.
Customer Satisfaction Survey
Previously, the Council briefly discussed the possibility of undertaking a customer service /
satisfaction survey; and that our website could be used to do that. Unfortunately, use of
websites for public opinion surveys are not very scientific, and therefore do not provide much
usefulness for such information in this process. We would need to undertake a process that
was scientifically valid and statistically reliable for such an exercise to be of any value, and the
Council has not yet authorized such a project.
Consideration of Additional Off-Sale Retail Outlets
As Brookings continues to grow, the question can be asked as to whether or not we are large
enough to support additional retail outlets at different locations around the community.
Obviously, communities much smaller than Brookings have more than one retail outlet for
spirits. We already have numerous retail outlets for beer and wine. This becomes an issue of
market size and demographics. The answer to this question is beyond the scope of this memo,
but the question should probably be pursued.
If the City were to consider additional off-sale locations, or any partnership with a management
contract for additional locations, commissioning another study would probably be advisable.
Without the benefit of quantifiable data from a study, my speculation is that additional municipal
off-sales would not be profitable as operating and capital expenses would likely exceed revenue.
If the City were to get out of the municipal operation and opt for private liquor stores by
City of Brookings
November 15, 2011
issuing multiple off-sale licenses to the private sector, that will be for the market and the private
sector to determine.
If we chose the latter, we would then have to face the issue of establishing a liquor license fee
for an off-sale liquor license.
City of Brookings
November 15, 2011
Excerpt from the Brookings City Council Meeting, September 27, 2011
The Brookings City Council held a meeting on Tuesday, September 27, 2011 at 5:00 p.m., at City
Hall with the following members present: Mayor Tim Reed, Council Members John Kubal, Mike
McClemans, Tom Bezdichek, Ope Niemeyer, Jael Thorpe (left at 6:00 p.m. and returned at 6:30
p.m.) and Keith Corbett. City Attorney Steve Britzman, City Manager Jeff Weldon and City
Clerk Shari Thornes were also present.
Brookings Municipal Liquor Store. The City Council discussed the continued operation of
the Municipal Liquor Store. McClemans presented options previously considered before the
Liquor Store moved to its current location. Other topics/issues discussed included the
following: Are there reasons to do something different; consideration of additional locations;
review of current location lease terms; and ways to improve the override. There was
consensus to hold a special two-hour retreat on the BMLS issue only. Meeting to be held in the
City Council chambers on an “off” Tuesday commencing at 5:00 p.m. The following
background information was requested: public input options--satisfaction survey options
(website); estimated replacement costs for land and building; standard industry margins;
consultant reports and labor costs.
City of Brookings
November 15, 2011
3. Adjourn