Loading...
032607 CC WS Min CITY OF SHOREWOOD CITY COUNCIL WORK SESSION MONDAY, MARCH 26, 2007 5755 COUNTRY CLUB ROAD COUNCIL CHAMBERS 7:30 P.M. or Immediately following the Regular City Council meeting MINUTES 1. CONVENE CITY COUNCIL WORK SESSION Mayor Lizee called the meeting to order at 9:02 P.M. A. Roll Call Present. Mayor Lizee; Councilmembers Callies, Turgeon, Wellens and Woodruff; Administrator Dawson; and Finance Director Burton Also Present: Liquor Operations Manager Swandby; and Paul Kaspszak, Executive Director Minnesota Municipal Beverage Association Absent: None B. Review Agenda Without objection from Council, Mayor Lizee proceeded with the Agenda for the meeting. 2. LIQUOR OPERATIONS Administrator Dawson stated that the Liquor Operations Committee met the week of March 19, 2007, to evaluate the direction the City's municipal off-sale liquor operations should be taking. On behalf of the Liquor Operations Committee, a narrative memorandum and related supportive documents (many of them prepared by Staff, and some by Councilmember Woodruff) were assembled for Council for use during Council discussion. He then stated Council may want to consider the final 2006 financial information for liquor operations during the discussion. Dawson stated because Councilmember Wellens had expressed concern about the City being in the liquor operations business, a list of considerations was prepared for Council to review should it consider stopping the City's involvement in that business. He then stated the information depicted that the City had been profitable with its liquor operations for the last few years, although it was barely profitable in 2006 once the one-time charges were factored out. He acknowledged the very good job Mr. Swandby had done in fine-tuning the liquor operations. The personnel costs were detracting from the profitability, as well as the decline in sales. He suggested Council consider reducing the liquor store operations staff by one full-time equivalent (FTE) position. Dawson stated Paul Kaspszak, Executive Director Minnesota Municipal Beverage Association, was present this evening to answer any questions Council may have. Mr. Kaspszak provided an overview of the history of municipal liquor stores and what was going on in the industry. He indicated the purpose of municipal liquor stores today was to control the distribution of alcohol while simultaneously generating income for the community. Off-sale municipal liquor operations have geographic exclusivity, but not competitive exclusivity. In Minnesota, there are more than 220 cities CITY OF SHOREWOOD WORK SESSION MEETING March 26, 2007 Page 2 of 6 with off-sale or on-sale/off-sale combination municipal operations, operating approximately 250 facilities. Mr. Kaspszak stated the trend was toward more off-sale liquor purchases due to things such as the high cost of alcoholic beverages in establishments, and to the .08 DUI limit. The sale of wine in grocery stores continues to be pursued, although it would be unlikely that it would be approved during this legislative session. The sale of wine in grocery stores would not paralyze a municipal operation, although it may impact how it operates. Councilmember Callies questioned what Council hoped to accomplish at this work session. Administrator Dawson stated his intent was to provide information that would stimulate discussion regarding the future of liquor operations, and to gain a sense of direction from Council. Mr. Kaspszak stated he shared the City's liquor operations financial information with one of the respected municipal liquor operations managers in the State. That manager stated labor costs appeared to be high after a quick review of the information. Councilmember Wellens stated the City's net profit as a percent of sales in 2005 was one-third the amount for the average identified in a comparison of metropolitan area city liquor store operations in 2005. Mr. Kaspszak stated that mayor may not be a valid comparison; it would depend on how each city dealt with various components of its financials. Kaspszak stated there were too many variables to make a valid assessment unless each city's information was reviewed in detail. Wellens stated because the 2004 net profit as a percent of sales comparison figures were similar, he thought it was a valid comparison. Kaspszak clarified that net profit as a percent of sales was calculated by dividing the net profit by gross sales. Councilmember Woodruff commented that 1.5% - 2.5% was the net profit as a percent of sales range for a supermarket; for liquor operations that figure should be significantly higher. Kaspszak stated the figure should be approximately 5% for a liquor store in the metropolitan area. Mr. Swandby distributed and explained the following summary financial statement comparison reports for the Waterford and Plaza stores combined for January 1, 1998, - December 31, 2006: the combined sales report; the combined liquor sales percentage by personnel report; and the combined liquor sales by percent report. He highlighted the impact various surrounding stores and their openings and closings had on sales. He then explained that a gross profit (= sales - cost of goods sold) percentage figure of 25% would be considered favorable; for the last five years it approximated 27% which would imply that purchasing was being done correctly and there was minimal inventory loss. Mr. Swandby stated that when he reviewed the net operating income ( = gross profit - operating expenses) comparisons, it became apparent to him that personnel costs were high. He recommended that the liquor operations staff be reduced to two FTE's from three FTE's; he would assume the responsibilities for the existing FTE, and part-time help would need to be added. That staffing change would result in a savings of approximately $43,000 per year. He also explained that 2006 had a net operating income loss of approximately $15,000. If depreciation of approximately $33,000 was not included in the expenses, there would have been a net operating income gain of approximately $18,000. Councilmember Wellens clarified that the reason he asked Council to discuss the future of the City's liquor operations business was mainly financial and a little philosophical; it was not about Mr. Swandby's performance. Wellens stated he had attended the Liquor Operations Committee meeting last week and he had reviewed all the information provided. His recommendation was to close the Waterford Store as soon as the lease for the store expired, and to put the Shorewood Plaza Store up for sale. He stated the potential move CITY OF SHORE WOOD WORK SESSION MEETING March 26, 2007 Page 3 of 6 toward the sale of wine in grocery stores would be a small risk. He commented that the trend was to close municipal liquor operations in Minnesota: there were 280 in 1995 and there were 255 in 2004. He questioned why the third FTE position had not been eliminated 10 years ago, which could have resulted in savings of approximately $350,000 during that time. Councilmember Callies stated she thought she understood that Councilmember Wellens wanted to leave the liquor operations for both philosophical and financial reasons. She commented if the City were not already in the business she would not be in support of entering into it. She then stated because the lease for the Waterford Store was expiring, now could be an opportune time to shut that store down. She stated the performance of that store had not been bad, although it was not a significant source of revenue for the City. She stated previous analysis indicated that it would not be a good strategic move to only have one store. Therefore, she questioned what the financial impact be to keep both stores operational until the lease for the Shorewood Plaza Store expired (in October 2008), and was there any way to synchronize the leases so they would expire at the same time. Mr. Kaspszak stated it was good the Council was reviewing the situation. It appeared that the City considered liquor operations as a legitimate business, which was a change from 10 years ago when it was run by a part-time person. He commented that more and more cities were building their own stores for their liquor operations and exiting from their lease situation; he clarified he was not making a recommendation either way. In response to a question from Councilmember Turgeon, Mr. Swandby explained the lease cost for the Waterford Store was $55,000 per year plus 12% of the gross sales greater than $750,000 not to exceed $1 million per year. Swandby stated it was an opportune time to renegotiate a year-long lease (it was currently renewed on a month-to-month basis). He also explained if the staffing changes he recommended were implemented than profitability for both stores should be roughly equivalent. Although he did not think the potential sale of wine in grocery stores was a big risk, he did think the stores may have to upgrade the quality of wine they specialized in. Administrator Dawson explained how the current lease for the Waterford Store was arrived at. Director Burton stated the Waterford Store had consistently made a profit each year recently, albeit not a large profit. Councilmember Turgeon stated if the sales at the Waterford Store increased to more than $750,000 then the lease cost would increase. That store also needed to have various repairs done. Therefore, it may be easier to not continue operations at that store. Director Burton and Mr. Swandby clarified the credit card processing rates were the same for both stores. Swandby stated the rates were good, and they varied based on sales volume. In response to a question from Councilmember Turgeon, Mr. Swandby explained physical inventory counts were done quarterly at each store. Last year there was a shortage of approximately $600 at the Waterford Store, and the year before that it was high by approximately $200. There was not a theft issue at the store. Director Burton stated one alternative to the situation could be to take the liquor operations combined balance of approximately $360,000 and put both stores on the market. If they sold for $400,000 the City would have $750,000 to invest at 5%, which would result in annual earnings of$37,500 per year and that would be close to the yearly transfers from the liquor operations to the General Fund. Mr. Swandby stated a rule-of-thumb for the sale of a liquor store would be 40% of the inventory plus fixtures and furnishings. CITY OF SHORE WOOD WORK SESSION MEETING March 26, 2007 Page 4 of 6 Councilmember Woodruff stated he was mystified as to why the 2007 liquor operations budget was approved with an operating loss. Mr. Swandby stated depreciation was included in the budget. Woodruff stated when he reviewed the gross profit for previous years, the approximate numbers were: 2004 = $590,000; 2005 = $559,000 and 2006 = $533,000. Yet the 2007 budgeted gross profit was approximately $578,000. He questioned why the 2007 budgeted gross profit was so much greater than 2005 and 2006. He stated the increase in projected sales for 2007 seemed opposite of what the trend had been in 2005 and 2006; therefore, how believable are the sales projections. Mr. Swandby stated that during the 2007 budgeting process he was told that Liquor Operations could not operate at a loss; therefore sales revenues would need to be increased. It may be more appropriate to use 2006 actual numbers as a base for projections. Councilmember Callies questioned what would be an acceptable gross profit and net operating income to achieve to keep the stores operational. If the objective is to close the stores, then there is no advantage to determining a rationale for doing so. Mayor Lizee stated Council needed to consider its involvement in the liquor operations business, its perspective as an employer, the service it provides to the community, and its lease obligations when determining the future of the business. She stated she thought it would be prudent to assess if it would be beneficial to extend the Waterford Store lease one year and keep that store operational while the long- term viability of remaining in the business or getting out of the business was assessed. She questioned how the City would compensate for the revenues lost by closing the stores. Councilmember Wellens again recommended that the Waterford Store be closed, and put the Shorewood Plaza Store up for sale. Councilmember Callies recommended a better lease be pursued for the Waterford Store to try and get the lease expirations for the two stores closer together, reduce the staff by one FTE, and make the decision about exiting the business when the lease for the Shorewood Plaza Store expired. Councilmember Woodruff stated he understood Councilmember Callies to say that operating only the Shorewood Plaza Store was no a viable option. He then stated the extra cost for a month-to-month lease for the Waterford Store was approximately $1,300 per month. He also stated he did not believe the 2007 budget sales figures. If the 2007 liquor operations operated at a loss, then Council would have to explain to the residents at a public hearing why the City was operating a business at a loss. Mr. Swandby stated that in 2006, liquor operations "put $18,359 in the bank". Mr. Kaspszak stated Mound had an operating loss for a couple of years, and it explained the reasons for the loss to its residents at a public hearing. Councilmember Callies stated she was not advocating operating the business at a loss. She was not convinced that now was the time to close the Waterford Store because of the Shorewood Plaza Store lease obligation. Councilmember Woodruff recommended the Waterford Store be closed and to continue operations at the Shorewood Plaza Store while it was put up for sale; and if there was no one willing to buy the store for an acceptable price, then continue operating the store, provided it could be run at a profit. Councilmember Turgeon recommended the Waterford Store be closed, and continue operations at the Shorewood Plaza Store while it was put up for sale. She commented that the Waterford Store would CITY OF SHOREWOOD WORK SESSION MEETING March 26, 2007 Page 5 of6 require some remodeling if it were to stay in operation. Mr. Swandby stated that remodeling at a cost of $30,000 could be delayed. Councilmember Callies stated that by recommending the sale of the store it implied Council did not want to continue to operate the store if it made a profit. She questioned if the discussion was really about profit or was it actually about getting out of the business. Mayor Lizee stated the chance for improved liquor operations profitability would be more likely if both stores remained operational until the second lease expired. If the Waterford Store lease could be extended at a lower lease rate that would improve profitability. Mr. Swandby stated if the leases remained the same and he reduced staffing as recommended, both stores would make equivalent profit. He stated it was likely the City could negotiate better lease terms for the Waterford Store. In response to a question from Mr. Kaspszak, Director Burton stated a very small portion of the Finance staff was allocated to doing work related to liquor operations. Councilmember Wellens's recap of the discussion was three Councilmembers wanted to close the Waterford Store and put the Shorewood Plaza Store up for sale. Councilmember Callies stated she understood Councilmember Wellens wanted the City to get out of the liquor operations business regardless of profit. Mr. Kaspszak questioned if the direction was to sell or eventually close the Shorewood Plaza Store, or was it to reevaluate the viability of continuing operating the Store when the lease was about to expire. Councilmember Turgeon stated she would be willing to reevaluate it in 2008. Councilmember Wellens concurred. Mayor Lizee stated she was concerned with the impact on operating expenses if one store was closed. Mr. Swandby stated his costs are split between the two stores, and he spends one-half of his time at each store. If both stores were to remain in operation and if the staffing changes were implemented, he would spend an additional eight hours at the Waterford Store. Councilmember Woodruff stated he wanted to be provided with a draft budget reflecting the Shorewood Plaza Store only, with realistic sales and expense projections. Mr. Swandby stated it would take some time; in the interim the 2006 sales and the expenses minus a $17,000 one-time expense and a reduction in $42,000 in payroll would be used. Woodruff stated payroll expense could be reduced further because there would only be one store operational. Administrator Dawson stated the lease for the Waterford Store would continue on a month-to-month basis for now. There was Council consensus to reduce the liquor operations staffing by one FTE. Staff stated it would have alternative scenarios prepared for closing the Waterford Store for the May 14, 2007, Council meeting. After discussion, there was Council consensus to allow staff to pursue a reduction in the month-to-month lease rate. CITY OF SHOREWOOD WORK SESSION MEETING March 26, 2007 Page 6 of6 3. OTHER There was no other business for discussion. 4. ADJOURN Wellens moved, Woodruff seconded, Adjourning the City Council Work Session Meeting of March 26,2007, at 10:26 P.M. Motion passed 5/0. RESPECTFULLY SUBMITTED, Christine Freeman, Recorder C1M~ LA~ Christine Lizee, Mayor