Chairman and Members of the Committee of the Whole. Robert Browne, Community Services Director

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1 TO: FROM: Chairman and Members of the Committee of the Whole Robert Browne, Community Services Director MEETING DATE: July 7, 2003 SUBJECT: Report CSAD Award of Food Operation Rights for the Memorial Centre to Shoeless Joe s Peterborough PURPOSE A report to inform Council Members on the results of a request for proposals for the operation of the new restaurant and concession areas of the Memorial Centre and exclusive food operation rights. RECOMMENDATION That a food service agreement for the Peterborough Memorial Centre be awarded to Shoeless Joe s Peterborough for a five-year term. BUDGET AND FINANCIAL IMPLICATIONS The acceptance of the proposal from Shoeless Joe s, will result in revenues of approximately $80-$100,000.in year one and expected revenues of $400-$600,000 over the five year term of the agreement. The feasibility study produced by SCI had shown incremental income of $202,000 in year one, as a result of the renovations, based on operating the food services internally. The SCI figure, however, did not include a number of overhead costs such as utilities, management, promotion and advertising etc. It is clear from our discussions with the food operation firms in the industry, and information from our consultant, Cam Hawkins, that this kind of return cannot be generated. The proposal from Shoeless Joe s pays all overheads,

2 Page 2 resulting in a true net return. Under their proposal, Shoeless Joe commits to paying $250,000 in year one and $150,000 in subsequent years for advertising and promotion, printing, supplies and miscellaneous expenses. BACKGROUND The current food situation In the past, the Memorial Centre has formally operated all the food concessions and bar areas in the Memorial Centre offering services from an east/west and north concession area as well as bar service at the east concession and in the area at the south end of the building called the Penalty Pub. Gross sales revenues were in the area of $255,000 with a net return of approximately 32% after deducting the cost of food and part-time wages. Actual net revenue was $106,000 in 2002 which included approximately $14,000 in vending revenue. When utilities costs and management salaries are considered the true net of expenses would be in the area of 12 15% of gross revenues. The Centre s annual attendance was in the 2,200 to 2,400 range and the average spending per patron was in the area of $1.35. In comparison to most other OHL facilities this is a very low return, attributable to our old outdated facilities, which did not have proper ventilation equipment and could therefore not offer many of the food items typically available in OHL facilities. SCI food predictions The SCI feasibility study, which looked at capital investment and resulting incremental revenue projected one of the significant revenue growth areas would be food sales and predicted general admission food spending would rise from $1.35 to $3.00. When combined with new spending in the club suite and restaurant areas, SCI predicted food sales per person would be more likely in the area of $5.80 per patron. The study also forecast that our average attendance per game would increase to 2,700 to 3,100 per game. The feasibility study indicated a net return of 30% on food and beverage sales in the different elements of the building net of food and labour cost. This net calculation, however, did not include provision for utility costs or supervision costs. Food operations request for proposal issued The City of Peterborough, in conjunction with our food consultant, Mr. Cam Hawkins, issued a request for proposal for the food operations at the Memorial Centre, specifically for the restaurant, club seating, super and goal suites, as well as the group sales area. The proposal also indicated it would consider adding the concession areas to the food service operation if financial terms were acceptable. The proposal was advertised and a mandatory briefing meeting was held at City Hall and attended by eight firms. The proposal closed on June 20, 2003 with 2 bids received, one from Compass Group, and the other from Shoeless Joe s Peterborough.

3 Page 3 Each proponent was interviewed by staff, our consultant Cam Hawkins, and representatives of the Memorial Centre Renovation Committee on June 26 th. One of the difficulties faced in preparing the proposal document was the fact we have had very poor historical sales reports and no experience of how the new facility with its modern amenities would perform. Bidders responding to the proposal have been cautious in their approach until some sales history has been established. The two proposals received include the concession areas in their bids and have asked the City for the opportunity to run all the food areas in the building. A report from our consultant analyzing the bids and the projecting financial terms of each is attached to this report as Schedule 1. The highlight of each proposal are summarized below: Compass Group The proposal from Compass Group offers the City the benefits of a large, multi-national company with extensive experience in a variety of venues including Kitchener Auditorium and Sir Sandford Fleming College food services. The Compass bid offered the City a minimum guarantee of $30,000 per year based on 5.5% of gross sales to a maximum sales level of $725,000 after which the City would receive 20% on revenue in excess of $725,000. Compass has predicted a profit level of 4.5% and has offered to share on a basis of 80/20 in favour of the City any profits in excess of the 4.5% level achieved. They proposed capital investment in the amount of $155,000 for cash registers, small wares, computers, etc. and would commit $2,000 per year for promotions and a 1.5% revenue contribution to repair and maintenance of equipment and their facilities. The City was concerned that this offer represented a very cautious approach in terms of revenue projection, calculation of profit and projected annual payments to the City estimated to be $51,108 in year one and $55,605 in year two, $60,465 in year three, $64,997 in year four, etc. Shoeless Joe s Peterborough The bid from Shoeless Joe s Peterborough offers the City a local bid from a successful restaurant operation here in the City. The bid is a partnership between a local franchise operator, Bob Marek, and the parent company Shoeless Joe s providing both local support and broader corporate support for major events and promotions. The Shoeless Joe proposal offered 8% of gross revenues for the luxury suites, restaurants, lounge area and 12% for event level concessions with no fixed minimum payment. They have based their projections on a far more aggressive revenue assumption of $1,156,000 in year one, progressing to $1,325,000 in year five. The City questioned how they would respond if initial sales were in the $800,000 range, and they indicated their percentage payments would not change, however they remain confident they can achieve significant improvement over this figure based on their well established sales approach and pricing structure proposed the Memorial Centre. They have offered to bring the major

4 Page 4 elements of their current restaurant menu to the Memorial Centre without inflating current prices, providing customers with an fair market price or street price opportunity throughout the building. If we assume concession sales in the area of $400,000 and a minimum of additional sales of $400,000 our initial year payment would be in the area of $80,000 and they have offered an additional 5% across the board on revenue in excess of $1,000,000. This is a superior financial offer to that of the Compass Group because of the security of the income stream they project. They have also provided advertising and promotional support in the amount of $100,000 in year one and $50,000 in subsequent years, $50,000 for printing including menus and $25,000 in subsequent years representing a strong financial commitment to support their operation. Shoeless Joe s recommended The committee met with each proponent to review his or her proposals. Although both proposals were excellent, the Committee unanimously recommends the proposal from Shoeless Joe s based on it s superior financial offer and the appeal of having a local restaurant operation and backed by its franchise owner/head office to provide this service. The Shoeless Joe proposal offered significant capital investment and a real enthusiasm to provide great value and street prices for our patrons and a professional commitment to service, to compliment our newly renovated facility. Separate request for proposal issued for food equipment It should be stressed the proposal discussed above is for the food operations component and assumes all required equipment will be provided and installed by the City. The proponents received detailed plans of the building including layouts for all food service areas showing location and type of all food equipment to be supplied by the City in these areas. based on the consultants design and revised budget estimates of $500,000 worth of kitchen, concession, and ventilation equipment required to service the various food areas throughout the building. A separate request for proposal outlining detailed specification for the supply of this equipment has been prepared and advertised by Marrack & Associates Inc., our food facility planning consultants, with a closing date of July 10, 2003 at City Hall. Staff are still searching for suitable used kitchen equipment and will deduct any used equipment items from bid submissions. Staff will bring forward a separate report on July 28, 2003 for Council s consideration dealing with the actual equipment purchase.

5 Page 5 SUMMARY The award of the food operations contract is an important component of the renovated Centre s operations which will enhance our customers experience. The Committee believes the Shoeless Joe s proposal is the best overall submission. All of which is respectfully submitted Robert J. Browne Community Services Director Contact Name: Robert Browne, Community Services Director, Phone (705) Ext Fax (705) rbrowne@city.peterborough.on.ca

6 City of Peterborough Evaluation and Recommendations Food and Beverage Bids, Peterborough Memorial Centre July 3, 2003 Cameron Hawkins & Associates Inc. Advisory Services to the Hospitality & Tourism Industries

7 Page 7 Background The process for selection of a foodservice contractor began with the development of a Foodservice Strategy for the Peterborough Memorial Centre. This strategy was based on, amongst other things: The vision for the Centre - how will it differ from today, what elements will remain constant The role of foodservice facilities in achieving this vision What new audiences will be sought/be attracted to the Peterborough Memorial Centre Benchmarks and best practices from other venues Challenges and opportunities with existing foodservice operations that must be addressed in the renovation Capital available for foodservice facilities Financial expectations upon completion Preferred contractual formal nature of financial relationship, term, buyout provisions Research, including interviews and/or site inspections was also conducted with similar venues including the Kitchener Memorial Auditorium, Barrie Molson Centre, Brampton Sports & Entertainment Centre, and Hershey Centre etc. At the conclusion of this research, we worked with the Peterborough Memorial Centre team to finalize its foodservice strategy, addressing: the role of food and beverage operations in achieving the business plan and financial goals for the Peterborough Memorial Centre renovation nature and extent of foodservice facilities to be provided market position of food and beverage facilities preliminary financial projections opportunity for outsourcing food and beverage operations opportunity for third party capital desirability of aligning some or all of the food and beverage facilities with recognized national brands Solicitation of Bids A two-stage process was used to solicit bids from foodservice operators. An Information Session was held, with notice published in the local paper and sent directly to major foodservice companies and well-established local restaurateurs. This was followed by a formal Request for Proposals. In the end, bids were received from only two companies. Compass Group is a large international foodservice operator with considerable expertise in the management of foodservice facilities in sports venues. Shoeless Joe s is a recently opened casual dining restaurant in Peterborough, part of a growing regional chain of similar operations. A brief overview of each company and their initial bids follows:

8 Page 8 Company: Compass Group Canada Relevant Experience: SkyDome, Iroquois Sports Centre, Kitchener Memorial Auditorium Revenue Forecast Year 1: $725,271 Year 2: $736,150 Year 3: $750,873 Rental Proposal: Annual payment equal to the greater of $30,000 or 5.5% or gross revenues Other Payments: 20% of gross revenues in excess of $3,625,000 over five years $15,000 annual payment towards utilities $ 2,400 annually towards pest control $2,000 annually towards joint marketing Capital Investment: $155,000 for POS, specialty equipment etc.

9 Page 9 Company: Shoeless Joe s Relevant Experience: none Revenue Forecast Year 1: $1,156,000 Year 2 $1,245,000 Year 3: $1,325,000 Rental Proposal: Annual payment equal to the 8% of gross revenues Other Payments: 2.5% of gross revenues towards utilities to maximum $30,000 Capital Investment: Not specified estimated at $100,000 Evaluation of Bids Meetings were held with both proponents to clarify their bids and gain a better understanding of their relevant experience and their approach to this opportunity. We requested, and subsequently received, amended bids from both parties. Our comments follow. Compass Group Compass Group has amended their bid to include a profit share equal to 80% of the net operating profit after deduction of 4.5% of gross revenues as a minimum profit expectation for Compass. They have also revised the 20% bonus to an annual target of $725,000 versus the original 5-year target of $3.625 million. Financial projections provided by Compass reflecting their final proposal are shown below. Compass Group Projections Year 1 Year 2 Year 3 Year 4 Year 5 Total Revenue Projection $725,271 $736,150 $750,873 $765,891 $781,209 $3,759,395 Base Guaranteed Commission 30,000 30,000 30,000 30,000 30, ,000 Excess Commission on Base Sales 9,875 9,875 9,875 9,875 9,875 49,375 Royalty Payment on Sales In Excess of Base 54 2,230 5,175 8,178 11,242 26,879 Operating Profit Split on 80/20 Basis 11,179 13,500 15,416 16,944 18,433 75,471 Projected Annual Commissions 51,108 55,605 60,465 64,997 69, ,725 Total Rental/Commission Yield 7.05% 7.55% 8.05% 8.49% 8.90% 8.03% Other Contributions Utilities Contribution Fixed Annual 15,000 15,000 15,000 15,000 15,000 75,000 Pest Control Contribution 2,400 2,400 2,400 2,400 2,400 12,000 Marketing Fund 2,000 2,000 2,000 2,000 2,000 10,000 Total Other Contributions 19,400 19,400 19,400 19,400 19,400 97,000 Total Contribution $70,508 $75,005 $79,865 $84,397 $88,950 $398,725 Table 1.0 Financial Bid Analysis Compass Group

10 Page 10 Shoeless Joe s Shoeless s Joes has revised its bid to pay 12% of gross revenues on concession sales, and a further 5% on sales in excess of $1 million. Financial projections provided by Shoeless Joe s are shown in the following table: Shoeless Joe's Projections Year 1 Year 2 Year 3 Year 4 Year 5 Total Revenue Projection $1,156,000 $1,245,000 $1,325,000 $1,325,000 $1,325,000 $6,376,000 Base Guaranteed Commission Concession Sales 400, , , , ,000 2,175,000 Percentage Commission 108, , , , , ,080 Additional Commission on Sales 7,800 12,250 16,250 16,250 16,250 68,800 Operating Profit Split on 80/20 Basis Projected Annual Commissions 116, , , , , ,880 Total Rental/Commission Yield 10.06% 10.35% 10.58% 10.58% 10.58% 10.44% Other Contributions 0 Utilities Contribution 28,900 30,000 30,000 30,000 30, ,900 Pest Control Contribution Marketing Fund Total Other Contributions 28,900 30,000 30,000 30,000 30, ,900 Total Contribution $145,180 $158,850 $170,250 $170,250 $170,250 $814,780 Table 2.0 Financial Bid Analysis Shoeless Joe s

11 Page 11 Analysis Financial Considerations The projected yield from the Shoeless Joe s proposal is significantly higher than the Compass proposal, due in large part to the revenue projections used by each proponent. In our view, the revenue projections by Shoeless Joe are very aggressive and would require per capita expenditures not typically found in similar venues. To evaluate both bids on an equal footing we conducted a sensitivity analysis using annual revenues ranging from $600,000 to $850,000, which we believe is a reasonable expectation during the first three years of operation. As shown in the following table, the Shoeless Joe s bid still produces higher net revenue, but the gap is considerably smaller. In fact, for revenues of $800,000 (which we consider to be reasonable and achievable) the two bids are virtually identical. For revenues in excess of $800,000 the revised Compass bid provides the higher aggregate contribution. Level 1 Level 2 Level 3 Level 4 Level 5 Level 6 Revenue Projection $600,000 $700,000 $800,000 $900,000 $1,000,000 $1,100,000 Total Contribution - Compass $61,400 $69,100 $93,075 $116,775 $141,775 $167,275 Total Contribution - Shoeless Joe's $73,800 $85,400 $96,800 $108,180 $119,400 $131,500

12 Page 12 Table 3.0 Financial Bid Evaluation Sensitivity Analysis Based on recent results by other OHL venues with similar facilities, we believe that annualized sales will be in the $600,000 to $700,000 range. At this revenue level, Shoeless Joe s would pay approximately 20% to 24% higher annual commissions. We also assessed the proposals based on quality of income, defined as the reliability or predictability of the revenue stream. Guaranteed annual payments are considered the highest quality income. Payments based on gross revenue are the next highest in quality, and for the bids received, are almost comparable to guaranteed annual payments. Payments based on operating profit are considered the lowest quality of income. A significant percentage of the Compass annual income is derived from guaranteed annual payments, while all of the Shoeless Joe s revenue is based on a percentage commission. Between 15% and 20% of the Compass projected income is derived from a share of operating profits. Peterborough Memorial Centre Bid Evaluations Quality of Income Level 1 Level 2 Level 3 Level 4 Level 5 Level 6 Revenue Projection $600,000 $700,000 $800,000 $900,000 $1,000,000 $1,100,000 Compass Guaranteed Annual Payment 80.46% 71.49% 53.08% 42.30% 34.84% 29.53% Revenue Based Payments 4.89% 12.30% 26.73% 38.43% 45.76% 50.74% Profit Based Payments 14.66% 16.21% 20.20% 19.27% 19.40% 19.73% Total Payments $61,400 $69,100 $93,075 $116,775 $141,775 $167,275 Shoeless Joe's Guaranteed Annual Payment 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Revenue Based Payments % % % % % % Profit Based Payments 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total Payments $73,800 $85,400 $96,800 $108,180 $119,400 $136,500 Table 4.0 Financial Bid Analysis Quality of Income

13 Conclusions Financial Considerations Page 13 At revenue levels we consider to be realistic and achievable, the bid from Shoeless Joe s pays the highest commission and has the highest overall quality of earnings. Experience and Resources In this category there is no question that Compass Group has the superior resources. They have considerable expertise in the management of food facilities in sports and entertainment venues, including some directly comparable to the Peterborough Memorial Centre. By their own admission, the proponents behind the Shoeless Joe s bid have only limited experience in foodservice operations and no experience in sports and entertainment venues. Recommendations The Shoeless Joe s bid provides the City with the best revenue potential, and is more in line with industry norms for a venue of this size. Their position in the local market and their demonstrated enthusiasm for the opportunity can be viewed as strengths. However, their lack of experience is a definite liability. Given the higher income potential for this bid (particularly at the lower revenue levels), we believe it is possible to implement strategies and procedures to mitigate some of the operational risk attached to this proposal. Accordingly, we recommend as follows: 1. The Shoeless Joe s bid be accepted, and best efforts be made to negotiate a minimum annual guaranteed income of $50, The franchisor, Shoeless Joe s Restaurants, be made a party to the agreement with specific obligations to provide training, pre-opening support, marketing expertise and back-up management. 3. The agreement be conditional upon the proponent remaining a franchisee in good standing with Shoeless Joe s Restaurants. 4. The agreement stipulate that the operator will provide a pre-opening operational plan and annual business plan satisfactory to the City; and 5. Contract administration procedures be developed to regularly review administrative controls, human resource practices and financial management processes used by the operator.