jurisdiction: US

text: b" Smithsonian Institution\n Office of the Inspector General\n\n\n In Brief Friends of the National Zoo Revenue Operations\n Report Number A-06-01, August 28, 2007\n\n\n\n\nWhy We Did This Audit What We Found\n\nFriends of the National Zoo FONZ has made significant contributions to the Zoo. It promotes quality\n(FONZ) is a nonprofit educational programs for the public, generates profits from its concessions and\norganization governed by a parking operations, and marshals hundreds of volunteers who help support many\nmember-elected Board of important functions for the Zoo. Nonetheless, we identified numerous areas\nDirectors. FONZ has an where FONZ can improve its revenue-generating operations by:\nagreement with the Smithsonian\nto operate the concessions at the \xc2\x83 Strengthening its retail inventory management practices through\nNational Zoological Park (Zoo), ensuring optimum stock levels and reducing the cost of goods sold.\nthe net proceeds from which are to\nbe used exclusively for the benefit \xc2\x83 Increasing the use of carts, tents, tables, and other temporary structures\nof the Zoo. to supplement the lack of permanent square footage available for retail\n and to complement food and beverage offerings.\nThe Zoo\xe2\x80\x99s Deputy Director\nrequested that we evaluate FONZ\xe2\x80\x99s \xc2\x83 Streamlining its overall retail staffing structure.\nrevenue operations. Our\nobjectives were to determine \xc2\x83 Establishing aggressive financial targets for revenue and net contribution\nwhether FONZ is managing the growth and exploring all options for achieving these targets.\nZoo\xe2\x80\x99s revenue operations in the\nmost efficient and profitable \xc2\x83 Enhancing the quality of the visitor experience through improving its\nmanner. customer service training and continuing efforts to better assess customer\n satisfaction.\n\nWhat We Recommended \xc2\x83 Reexamining the free parking policies for Zoo and FONZ employees as\n well as FONZ members.\nWe made 16 recommendations to\nstrengthen FONZ\xe2\x80\x99s revenue \xc2\x83 Developing, documenting, and monitoring policies and procedures in\noperations by improving financial accordance with the current needs of the organization.\nperformance, operational\neffectiveness, and the visitor \xc2\x83 Ensuring the master plan that is under development reflects the needed\nexperience. expansion of retail, food and beverage, and parking facilities, as well as\n the addition of other entertainment amenities.\nExcept for investment policy\noversight by the FONZ Board of During the course of our audit, FONZ management, working with its Board,\nDirectors, management generally adopted a new strategic plan that will focus on improving the visitor experience,\nconcurred with the report findings enhancing partnerships with stakeholders, and achieving organizational\nand recommendations. Based on excellence.\nimprovements already\nimplemented by FONZ\xe2\x80\x99s new For additional information or a copy of the full report, contact the Office of\nExecutive Director, we are closing the Inspector General at (202) 633-7050 or visit http://www.si.edu/oig.\n7 of the 16 recommendations\n\x0c\x0c\x0c\x0c Major Revenue Operations\n Program* FY 2005 FY 2006\n Merchandise $4,159,426 $5,687,401\n Food Service $3,814,496 $4,530,318\n Membership $2,165,117 $2,360,390\n Parking $2,151,796 $2,533,979\n *According to FONZ, in FY 2006, fundraising events generated\n $1,215,965 and picnics and parties generated $668,207.\n\nTo evaluate the operating efficiency and profitability of FONZ\xe2\x80\x99s revenue operations, we\nmet with Zoo and FONZ officials; toured Zoo concession areas; and reviewed FONZ\xe2\x80\x99s\ninternal controls, financial data, and information on the Zoo\xe2\x80\x99s ten-year master plan. We\nalso visited seven large zoos in the East and Midwest areas of the country to observe their\nrevenue operations. Through a survey we developed, we obtained data on revenue\noperations from a number of other zoos as well as Smithsonian Business Ventures and\n 1\ncompared key financial metrics to FONZ\xe2\x80\x99s operating results. We focused our analysis on\n2003 through 2005 as this was the most current data available at the time we conducted\nour fieldwork. Since the completion of our fieldwork, 2006 data for FONZ has become\navailable and FONZ has indicated that, in comparison to the other years in our analysis, it\nwas a very successful year. A more detailed discussion of our scope and methodology is\nincluded in Appendix A.\n\nAppendix B contains additional charts and information comparing FONZ to other zoos\nand SBV. Please note that comparisons throughout this report relating to cost of sales,\ndirect labor, and net contributions are shown as a percent of revenue, unless otherwise\nstated.\n\n\n\n\n1\n We did not verify the accuracy of the survey data provided by respondents for our analysis. We made\n certain adjustments to respondent data to improve comparability.\n 2\n\x0c TABLE OF CONTENTS\n\n\nResults in Brief.......................................................................................................................4\n\nResults of Audit .....................................................................................................................5\n\n Merchandise Operations...................................................................................................5\n\n Food Service Operations.................................................................................................10\n\n Customer Service.............................................................................................................13\n\n Opportunities Exist to Increase Parking Revenues by Curbing Free Parking .............15\n\n Goverance Over FONZ's Operations Needs Strengthening .........................................16\n\n Zoo Master Plan -- Vision for the Future ......................................................................19\n\nObservations on the FONZ-Smithsonian Agreement.......................................................25\n\nSummary of Management Response..................................................................................26\n\nOffice of the Inspector General Comments .......................................................................30\n\nAppendix A. Scope and Methodology.............................................................................A-1\n\nAppendix B. Financial Measures .....................................................................................B-1\n\nAppendix C. Management Responses............................................................................ C-1\n\nAppendix D. Contributors to the Report....................................................................... D-1\n\n\n\n\n 3\n\x0cRESULTS IN BRIEF\n\nFONZ has provided significant contributions to the Zoo over the years. It promotes\nquality educational programs for the public, generates profits from its concessions and\nparking operations, and marshals hundreds of volunteers who help support many\nimportant functions for the Zoo. Nonetheless, we identified numerous areas where FONZ\ncan improve its operations.\n\nFONZ could increase sales and reduce expenses in its merchandise operations by\nstrengthening its inventory management practices, increasing retail square footage, and\nstreamlining its management and staffing structures. Further, the FONZ Board of\nDirectors and the Zoo should explore all options, including the feasibility of outsourcing\nmerchandise operations, to enhance profitability. We also noted that store presentation\nneeded to be improved, and by the end of our audit, we observed that FONZ had made\nsignificant improvements in this area.\n Chart 1\nWhile FONZ\xe2\x80\x99s food and beverage Merchandise and Food & Beverage\nrevenues have generally been Net Contribution\nlower than those of the peer (as a Percent of the Peer Survey Average)\n 2\nsurvey average, FONZ has 120%\n 100%\ngenerated moderately higher net\n 3 80%\ncontributions owing to the lower Peer\n 60%\ncost of its food sales. FONZ can Survey\n 40%\ngrow net contributions from its 20%\n Average\n\nfood services and improve the 0%\nquality of the visitor experience 2003 2004 2005\nby expanding the use of its small Merchandise Food\n\npermanent food and beverage Chart 1 depicts merchandise and food service in relation to their peer\nlocations as well as its portable carts. survey averages and are not meant to be compared to one another.\nIn addition, FONZ should explore using carts to expand the variety of food items\noffered. Chart 1 shows FONZ\xe2\x80\x99s net contribution performance compared to the peer\nsurvey average for both its merchandise and food and beverage operations.\n\nWe believe FONZ could also increase its net contribution to the Zoo by improving\ncustomer service in its merchandise and food service operations. FONZ and the Zoo need\nmore comprehensive data about visitor experiences. Customer service feedback on\nFONZ\xe2\x80\x99s operations should be centralized and FONZ and the Zoo should establish a\ncoordinated process for documenting and evaluating comments and the results of follow-\nup efforts related to customer complaints. FONZ needs to place more emphasis on\nproviding outstanding customer service in the training it provides to management and\npermanent staff as well as to seasonal employees.\n\n2\n Peer survey averages were computed based on our survey of 32 large zoos, with 18 respondents. The peer\n survey averages only include those zoos that operate their own concessions, which amounted to\n3\n approximately ten for merchandise and eight for food service.\n Net contribution is sales revenue less cost of goods sold, direct labor expenses and other direct expenses.\n Other direct expenses were not fully comparable to other entities because of differences in expense\n structures and allocation methods.\n 4\n\x0cParking spaces at the Zoo are inadequate during peak months. FONZ and the Zoo, in\nconsultation with the Secretary, should examine two options for increasing parking\nrevenues: they should reevaluate the policy of allowing free parking for FONZ and Zoo\nemployees and others, and reexamine the unlimited free parking currently enjoyed by\nFONZ members.\n\nWe observed two areas where governance over FONZ\xe2\x80\x99s operations can be improved. The\nfirst concerns the way policies and procedures are developed, approved, and documented.\nThe second concerns how FONZ\xe2\x80\x99s Board monitors policy implementation.\n\nFinally, looking to the future, we considered the Zoo\xe2\x80\x99s ten-year master plan, which it has\nbeen developing since early 2005. The master plan is essentially a blueprint for updating\nthe Zoo\xe2\x80\x99s infrastructure and revitalizing its exhibits. Preliminary cost estimates range\nfrom $500 million to $600 million. We identified four areas that could dramatically\nincrease future revenues and enhance the quality of the visitor experience: the expansion\nof retail facilities, the expansion of food and beverage operations, the expansion of\nparking facilities, and the addition of other entertainment amenities that have been\nproven revenue-producers at other zoos. It is critical that the Smithsonian fully explore\nthese opportunities to maximize revenue for the Zoo. These facilities need to be included\nin the master planning process from the outset. Building large, sustainable revenue-\ngeneration into the design now will help maintain the Zoo at a world-class level well\nbeyond the initial ten-year planning horizon.\n\nWe are making 16 recommendations to strengthen FONZ\xe2\x80\x99s operations and the oversight\nof its activities.\n\nRESULTS OF AUDIT\n\nMerchandise Operations\n\nBecause the Zoo enjoys one of Chart 2\nthe highest visitor attendance Merchandise Revenue\nlevels of any U.S. zoo, estimated (as a Percent of the Peer Survey Average)\n 250%\nat about 2 million annually,\nFONZ has been able to generate 200%\n\nmerchandise sales that far 150%\nsurpass the peer survey average\n(see Chart 2). Nonetheless, its 100%\n\nhigh cost of goods sold (COGS) 50%\n Peer Survey\nand direct labor expenses make Average\n 0%\nfor net contributions that were\n 2003 2004 2005\nfar below the peer survey\naverage. FONZ could increase sales and reduce expenses by improving how it manages its\nmerchandise operations. Specifically, FONZ should strengthen its inventory management\npractices, increase retail square footage, reexamine its management and staff structure,\nand improve store presentation.\n\n 5\n\x0cWe also compared FONZ\xe2\x80\x99s merchandise operations to SBV\xe2\x80\x99s and found that FONZ\ngenerated higher net contributions relative to revenues, but by other measurements,\nFONZ performed both better and worse between 2001 and 2005. See Appendix B for\nadditional details.\n\nStrengthen Inventory Management Practices\n\nFONZ needs to strengthen its inventory management practices. We found that FONZ had\nnot developed meaningful inventory aging reports and lacked formal written policies to\nimprove sales of slow-moving merchandise. FONZ is performing some analyses of its\nmerchandise mix, but we noted that improvements could be made. For example, a\nconsultant retained by FONZ observed in 2007 that the overbuy of some merchandise\nclassifications needed to be kept under control and that other merchandise mix\nallocations should be reevaluated. According to FONZ\xe2\x80\x99s software provider, a customized\naging report could be designed for a fee of about $2,000. We believe that use of a\ncomprehensive aging report would enable FONZ to manage its inventory more\neffectively.\n\nWe also noted weaknesses related to the inventory turnover rate and COGS. FONZ\xe2\x80\x99s\ninventory turnover in 2004 and 2005 was 18 to 19 percent less than the peer survey\naverage, a factor in FONZ having profitability below the average. However, we did note\nthat FONZ significantly improved its inventory turnover rate in 2006.\n Chart 3\n Cost of Goods Sold\n FONZ\xe2\x80\x99s COGS exceeded the peer\n (as a Percent of the Peer Survey Average)\n 120% survey average for all 3 years in our\n 100%\n survey (see Chart 3). For example,\n in 2005, FONZ exceeded this\n 80%\n Peer Survey average by 9 percent. If FONZ\xe2\x80\x99s\n Average\n 60% COGS had been at the peer survey\n 40% average, its net contribution would\n 20% have increased by approximately\n 4\n $160,000.\n 0%\n 2003 2004 2005\n\n\nA 2007 assessment by an independent retail merchandising consultant also identified\ndeficiencies in FONZ\xe2\x80\x99s management of its merchandise operations. The consultant\nconcluded that FONZ\xe2\x80\x99s inventory planning and controls were weak and its merchandise\nassortment was too broad, and recommended reducing non-productive merchandise\nstyles, thereby decreasing related inventory costs. For example, the consultant observed\nthat 47 percent of the inventory generated the bottom one-third of sales dollars, while\nonly 14 percent of the inventory was invested in styles (types of merchandise) generating\nthe top one-third of sales dollars. The consultant\xe2\x80\x99s analysis also identified missed sales,\nreporting that nearly half of FONZ\xe2\x80\x99s top 50 items were out of stock or had less than three\n\n4\n We note that a high COGS as a percent of revenue could indicate either a higher price paid for\n merchandise or an insufficient retail mark-up.\n 6\n\x0cweeks\xe2\x80\x99 supply on hand. Additionally, 5 of the top 10 items were out of stock or had under\ntwo weeks\xe2\x80\x99 supply. Further, staff in the merchandise operation was viewed by the\nconsultant as not motivated and the retail executive team appeared to lack merchandising\nskills.\n\nDuring our fieldwork, we also noted that FONZ should examine whether it could\nimprove its margins with more efficient sourcing. For example, because FONZ and SBV\nsell similar items, such as panda bear plush items, we suggested that FONZ and SBV\npursue joint purchasing efforts to take advantage of volume discounts as well as other\nrelated benefits. The then-president of SBV\xe2\x80\x99s museum retail operations agreed to explore\na joint purchase program. Partnering with SBV would also further help FONZ\xe2\x80\x99s stated\nstrategic goal of collaboration with the Zoo and the Smithsonian to \xe2\x80\x9cmaximize the\ncombined strengths of all.\xe2\x80\x9d\n\nIncrease Square Footage of Retail Space\n\nAs has been pointed out by various consultants, current limitations on retail space\nhamper FONZ\xe2\x80\x99s ability to increase revenues from merchandise operations. FONZ should\ndevelop a short-term plan to address this issue. In the longer term, FONZ, in\ncoordination with Smithsonian management, must fully integrate the locations and\ndesigns of its retail merchandise and food operations into the Zoo\xe2\x80\x99s ten-year master plan\n 5\nto maximize net contributions for the Zoo.\n\nCurrently, FONZ has approximately 3,700 square feet of permanent retail space, while the\npeer survey average is approximately 6,500 square feet. A 2002 consultant\xe2\x80\x99s study\nconcluded that FONZ\xe2\x80\x99s retail space was insufficient for the Zoo\xe2\x80\x99s existing visitation levels\nand that it needed 6,300 square feet. We noted that FONZ\xe2\x80\x99s 2005 sales per square foot\nwere three times the peer survey average. While this may be a positive indicator,\naccording to the Museum Retail Industry Report 2004 it could also indicate a need for\nmore space.\n\nIn the short run, FONZ should increase efforts to expand the use of carts, tents, tables,\nand other temporary structures to supplement the lack of permanent square footage\navailable for retail. An independent retail merchandising consultant similarly noted\nrecently that FONZ should add overall square footage via new shops and/or carts and\nkiosks. Particular attention should be given to strategically locating facilities around\nthe new animal habitats in Asia Trail I and the elephant habitat as part of Asia Trail II. We\nexpect that there will be a spike in visitors when Asia Trail II opens to the public, creating\nsignificant sales opportunities.\n\nIn their plans for long-term retail growth, FONZ\xe2\x80\x99s Board of Directors and the Zoo should\nalso fully explore the benefits of outsourcing FONZ\xe2\x80\x99s retail merchandise operations.\nOther zoos we visited or surveyed that used third-party entities to run their merchandise\noperations generally had positive experiences. For example, one zoo stated that\n\xe2\x80\x9cmerchandise sales through our vendor have grown significantly.\xe2\x80\x9d Another zoo\n\n5\n We discuss the longer-term issues in more detail in the report section on the master plan.\n 7\n\x0cresponded that once retail operations were transferred to an outside vendor they received\n\xe2\x80\x9cpositive revenue payback and (the) vendor has made significant improvements to (our)\nretail stores.\xe2\x80\x9d Moreover, according to a contract proposal provided to FONZ by a\nspecialty retailer in 2005, the retailer would have provided FONZ one-time payments\ntotaling up to $899,000 and annual net contribution increases of 11 to 19 percent over\nwhat FONZ was generating from its own merchandise operations. After analysis, FONZ\nviewed the proposal as highly speculative and rejected it.\n\nRegarding financial accountability and transparency for FONZ\xe2\x80\x99s concessions, we observed\nthat the Board minutes often compared performance against annual budgets. However,\nwe saw little evidence in the minutes that the Board held FONZ management\naccountable for meeting long-range financial or performance goals. FONZ\xe2\x80\x99s former\nExecutive Director noted that he had not developed any strategic plans, but that FONZ\nwas incorporated in the Zoo\xe2\x80\x99s strategic plan. FONZ recently established new Goals and\nStrategic Priorities indicating that a 2007-2010 operational plan will be presented to the\nBoard. Furthermore, FONZ intends to define the means to measure, monitor, and\nimprove performance for each goal and component area. In our view, aggressive financial\ntargets need to be established for achieving and sustaining long-term growth and should\nbe used as benchmarks to evaluate FONZ\xe2\x80\x99s performance and the benefits of outsourcing.\n\nStreamline Overall Staffing Structure\n\nFONZ should reexamine its overall staffing structure, which seemed top-heavy. Generally,\nFONZ\xe2\x80\x99s direct labor expense as a percentage of revenue has been higher than the peer\nsurvey averages. For example, in 2005, the number of FONZ managers supporting\nmerchandise operations was 55 percent above the peer survey average. At the same time,\nFONZ\xe2\x80\x99s managers were overseeing 44 percent fewer staff than managers at other zoos.\n\nAs another example, one zoo we visited, with similar revenues, had an executive-level\nmanager, three store managers, and a part-time clerical employee. In contrast, FONZ had\ntwo executive-level managers, four store managers (including an assistant manager), a\nbuyer, a full-time clerical employee, and retained the services of an outside merchandise\nconsultant to supplement its management.\n\nIn our view, FONZ has an opportunity to increase net contribution by reevaluating its\nstaffing structure. For instance, FONZ could compare its management and staff resources\nto other zoos with similar revenues. FONZ agreed that this area requires further analysis\nand indicated that it would review its staffing structure.\n\n\n\n\n 8\n\x0cImprove Store Presentation\n\nAt the time of our audit fieldwork, FONZ\nneeded to substantially improve the\npresentation of merchandise in its stores.\nDuring a walkthrough of FONZ\xe2\x80\x99s stores\nwith the then-president of SBV\xe2\x80\x99s retail\noperations, we observed long lines due to\nfew cash registers, customers having\ndifficulty walking through crowded aisles,\nand some shelves that were overloaded with\nmerchandise while others were empty. On\nanother visit, we noted boxes of\n 2006 FONZ display - empty fixtures, unattractive merchandise\nmerchandise stacked on the store floor display, damaged wall\nwhile some shelves were empty and\nemployees were conversing outside the front of the store. A 2007 assessment of FONZ\xe2\x80\x99s\nretail operations by an independent retail merchandising consultant also concluded that\nFONZ\xe2\x80\x99s merchandise presentation could be improved and that its stores were poorly\nmaintained.\n At the exit conference we toured\n the two largest retail facilities at\n the Zoo with FONZ management\n and noted that significant\n improvements had been made to\n the presentation of these stores.\n FONZ also added a cash register\n to its largest store. According to\n FONZ\xe2\x80\x99s Executive Director, one\n of the refurbished stores has\n realized a 12 percent increase in\n sales as compared to the same\n 2007 FONZ display - stocked fixtures, attractive merchandise display, fresh paint\n period last year, and FONZ will\ncontinue to reevaluate its floor designs and layouts, fixtures, and overall visual\npresentation.\n\nRecommendations\n\nTo strengthen management of FONZ\xe2\x80\x99s merchandise operations, we recommend that the\nExecutive Director, FONZ:\n\n 1. Develop detailed inventory aging reports and perform appropriate analyses to\n ensure optimum stock levels and improve overall inventory management.\n\n 2. Determine why FONZ\xe2\x80\x99s COGS appears to be higher than the peer survey average\n and make appropriate changes as necessary, including possible joint purchasing\n opportunities with SBV.\n\n 9\n\x0c 3. Increase efforts to expand the use of carts, tents, tables, and other temporary\n structures to grow merchandise net contributions.\n\n 4. Reexamine FONZ\xe2\x80\x99s overall staffing structure and make adjustments as warranted.\n\nTo maximize net contributions from merchandise operations, we recommend that the\nFONZ Board of Directors and the Zoo:\n\n 5. Establish aggressive, but achievable, financial targets for revenue and net\n contribution growth and explore all options, including the feasibility of\n outsourcing merchandise operations, for achieving these targets.\n\nFood Service Operations\n\nWhile FONZ\xe2\x80\x99s food and beverage revenues have generally been lower than the peer survey\naverage (see Chart 4), FONZ has generated higher than average net contributions from\nfood service because of its lower cost of food sales (see Chart 5). Based on the\nlimited third-party concessionaire data provided by SBV (data that accounted for about\none third of SBV\xe2\x80\x99s total food revenues), we noted that FONZ produced net contributions\nthat were double SBV\xe2\x80\x99s.6\n Chart 4 Chart 5\n Food & Beverage Revenue Cost of Food Sold\n (as a Percent of the Peer Survey Average) (as a Percent of the Peer Survey Average)\n 120% 120%\n\n 100% 100%\n\n 80% 80%\n Peer Peer\n 60% Survey 60% Survey\n Average Average\n 40% 40%\n\n 20% 20%\n\n 0% 0%\n 2003 2004 2005 2003 2004 2005\n\n\n\nNonetheless, we believe that FONZ can increase net contributions from its food services\nby expanding the use of its small permanent locations as well as portable carts. To do so,\nFONZ should employ a more effective strategy for staffing the facilities, especially during\npeak months, and consider offering a wider variety of food. According to discussions with\nFONZ officials, a key approach to staffing its food services has been to recruit students\nfrom the inner city. FONZ also employs other methods of recruiting, such as job fairs and\nnewspaper and online job postings. However, FONZ still had not succeeded in obtaining\nadequate resources to open many of its food service locations. For example, according to\nFONZ\xe2\x80\x99s Director of Food Service, in 2006 FONZ needed 108 food service employees to\nstaff all food service locations fully but was only able to fill 70 positions. Excerpts from\nvisitor letters we reviewed also reinforce the need to focus attention on expanding food\n\n\n6\n SBV\xe2\x80\x99s \xe2\x80\x9cnet contribution\xe2\x80\x9d refers to the percentage of gross food sales (less discounts) received by SBV from\n its third-party concessionaires.\n 10\n\x0cand beverage services. One April 2006 visitor wrote that \xe2\x80\x9cthe lack of water available for\npurchase is pathetic.\xe2\x80\x9d Another frustrated customer during a peak month vented to us that\nshe had to wait in line a long time for water because the vending machines were not\nstocked. FONZ\xe2\x80\x99s inability to staff its food services adequately translates into lost\nopportunities to grow profits as well as negative visitor experiences.\n\n\n\n\n Un-staffed FONZ food stands during 2006 peak season\n\nFONZ also should explore\nusing smaller locations and\ncarts to expand its variety of\nfood items. A 2002 consultant\nstudy similarly recommended\nthat FONZ expand its cart\nprogram. Currently, the\nmajority of FONZ\xe2\x80\x99s food sales\nare from the standard hot dogs,\nhamburgers, chicken nuggets,\npizza, and popcorn fare. Other\nzoos we visited offered a much Columbus Zoo\xe2\x80\x99s offerings include spring rolls,\n teriyaki chicken, and General Tso\xe2\x80\x99s rice bowls\nwider variety of foods such as\nmade-to-order wraps, culturally\ndiverse dishes, branded ice\ncream products, fresh-cut\npotato chips, homemade fudge,\nand fresh-squeezed lemonade.\n\nWe found that many zoos\ncontract out at least some of\ntheir food services, particularly\nportable carts, and have reaped\nsignificant financial benefits.\nThird-party concessionaires can Lincoln Park Zoo offers Mexican dishes\n\nprovide quality specialty food offerings and generate increased cash flow. For instance,\none zoo in our survey stated that outsourcing carts resulted in a doubling of cart\n\n 11\n\x0c revenues. FONZ told us that in the past they had\n attempted to use third-party concessionaires on\n a temporary basis to provide supplemental food\n service, but because of other events occurring\n around the District, they had difficulty acquiring\n services. We believe that pursuing seasonal or\n longer-term contracts with third-party\n concessionaires for supplemental food service\n could help solve FONZ\xe2\x80\x99s recruiting problems,\n create an opportunity to provide visitors with a\n better variety of food offerings, and yield more\n profits for use in expanding the Zoo\xe2\x80\x99s\nSaint Louis Zoo\xe2\x80\x99s fresh potato chip stand illustrates use of educational and conservation programs.\nthird-party concessionaire\n\nAt the time of our exit conference, we took a\ntour of some areas of the Zoo with FONZ\nmanagement and noted that there was an\nincreased cart presence from third-party\nconcessionaires, including specialty items\nsuch as gelato and fresh-squeezed lemonade.\nFONZ acknowledged the difficult challenges\nin recruiting concessions staff and indicated\nthat it is evaluating its recruiting program\nand taking steps to recruit and retain quality\nemployees in sufficient numbers.\n FONZ recently added new third-party concessionaire\n carts for fresh-squeezed lemonade and snacks\nRecommendations\n\nTo increase food and beverage revenues and improve visitor services, we recommend that\nthe Executive Director, FONZ:\n\n 6. Expand the use of its small permanent locations and portable carts by developing a\n more effective strategy for staffing the facilities and serving a wider variety of food\n items at these locations.\n\n 7. Increase efforts to award seasonal or longer-term contracts to third-party\n concessionaires for supplemental food services.\n\n\n\n\n 12\n\x0cCustomer Service\n\nWe believe FONZ could increase net contributions from merchandise and food\noperations by enhancing the quality of the visitor experience. FONZ and the Zoo obtain\ncustomer satisfaction data through a variety of sources including visitor surveys\nconducted by an outside consultant and \xe2\x80\x9csecret shopper\xe2\x80\x9d reports. Visitors also\ncommunicate their experiences through comment cards, emails, and letters. Based on\nthese sources of feedback and our own observations, customer service could be improved.\nFurther, we found that FONZ lacked a disciplined process for handling and learning from\ncustomer feedback.\n\nFor merchandise operations, a visitor survey performed by an outside consultant in the\nfall of 2004 (the latest year available) found that employee courtesy had improved since\nthat summer. Nonetheless, FONZ fell far below the averages of other zoos in this survey\nfor scores related to merchandise quality, price, and percentage of visitors making\npurchases. Moreover, we note that for the Zoo to \xe2\x80\x9cbe the world\xe2\x80\x99s finest,\xe2\x80\x9d FONZ will need\nto achieve higher levels than the averages.\n\nSecret shopper reports for 2005 and 2006 showed that employee courtesy towards visitors\nneeded improvement. For instance, in 2005, FONZ store employees did not greet one in\nfour secret shoppers in a friendly manner. In 2006, FONZ cashier and floor employees\nfailed to greet secret shoppers in a friendly manner 31 percent and 44 percent of the time,\nrespectively. More than one in four secret shoppers were not encouraged to visit again or\ngiven a friendly goodbye by FONZ cashiers.\n\nRegarding food service, a visitor survey from 2004 (the latest year available) documented\nthat food lines were too long, many food facilities were closed, and beverage vending\nmachines were not operating. FONZ scores for food price and quality were below the\naverages of other zoos. For example, on food prices, only 3 percent of Zoo visitors gave\nFONZ the highest rating, versus the 28 percent average of other zoos in the survey.\nTwenty-one percent of Zoo visitors gave food quality an excellent rating compared to the\nbenchmark of 52 percent. It appears to be making progress. We noted that the 2006 secret\nshopper reports showed that 46 percent of secret shoppers gave food taste an\n\xe2\x80\x9coutstanding\xe2\x80\x9d rating and 49 percent gave it a \xe2\x80\x9cgood\xe2\x80\x9d rating. Again, FONZ should strive to\nsurpass the average ratings for other zoos to accomplish its strategic goals.\n\nSecret shopper reports for 2006 generally indicated that FONZ food employees were\nattentive, knowledgeable, and tendered transactions properly. However, one in five secret\nshoppers was not greeted in a friendly manner or thanked after the transaction. Further,\nbetween 2005 and 2006, secret shopper scores reflected a general decline in cleanliness of\nthe food facilities. We experienced much the same during our visits to the Zoo, observing\nlong lines and unkempt areas at the Mane Restaurant. A summer 2006 visitor complained\nthat \xe2\x80\x9cyour employees working at the gift shop and snack stands were rude and were more\ninterested in talking with each other than waiting on the customers.\xe2\x80\x9d\n\n\n\n\n 13\n\x0cWe also found that there was no effective process for documenting and evaluating visitor\nfeedback on FONZ\xe2\x80\x99s operations or for the follow up and resolution of associated\ncustomer complaints because the information was dispersed to many offices without any\ncentralized tracking. FONZ was unable to provide any visitor comment cards to us\nbecause it disposed of the cards after review. FONZ also could not provide any evidence\nof required log-in or aggregated data used to analyze problems communicated through\ncomment cards, emails, or letters. In our discussions with FONZ\xe2\x80\x99s former Executive\nDirector, he indicated that the complaints were usually about issues FONZ already knew\nabout. Yet the Zoo and FONZ could provide only limited information on follow-up\nactions to correct the deficiencies and to communicate to the visitors. Further, while\nsecret shopper results were routinely discussed during management and staff reviews,\naccording to FONZ officials, performance goals for customer satisfaction were not\nestablished in employee performance plans. Consequently, we found a lack of\naccountability for timely resolution and lasting correction of customer service shortfalls.\n\nAccording to best practice, creating a customer feedback system provides an opportunity\nto discover potential problems early and begin to correct them. To be effective, however,\ngathering and measuring customer feedback must be consistent, and the results must be\nreviewed frequently. For example, over time, comment cards can help management gauge\nthe quality of both the service and food from the customer\xe2\x80\x99s perspective.\n\nBoth the Zoo and FONZ have made it a strategic goal to ensure that every visitor is\nprovided with outstanding customer service and amenities. To reach this goal, FONZ\nneeds to ensure that the formal and refresher training provided to management,\npermanent staff, and seasonal employees places more emphasis on providing outstanding\ncustomer service. We noted that FONZ offered one basic training class a year, and,\naccording to the former Executive Director, this training was conducted differently each\nyear. One manager noted that increased employee incentive programs such as perfect\nattendance or employee-of-the-month awards could help to improve performance.\nIncreased training and incentive programs could also help FONZ achieve its stated goal of\n\xe2\x80\x9cmaintaining competitive business practices, setting objectives and rewarding success, and\nproviding developmental and leadership opportunities.\xe2\x80\x9d In addition, having well-defined\nstandards for the visitor experience enables organizations to better hold managers and\nstaff accountable for performance.\n\nThe current Executive Director stated that FONZ will develop a new training program\nbased on recently adopted customer service standards. Further, he indicated that FONZ is\ndeveloping a concessions staff enrichment program to provide behind-the-scenes animal\ntours and other opportunities to connect staff more closely with the Zoo. FONZ also is\nworking with the Smithsonian\xe2\x80\x99s Office of Policy and Analysis to design, administer, and\nanalyze visitor surveys on a regular basis.\n\n\n\n\n 14\n\x0cRecommendations\n\nTo improve visitor services, we recommend that the Executive Director, FONZ and the\nZoo Director:\n\n 8. Continue to improve customer service training opportunities and incentive\n programs for permanent and seasonal retail and food operations staff, and have\n the training stress courtesy to visitors and keeping facilities clean and organized.\n\n 9. Establish a process for documenting and evaluating visitor feedback on FONZ\xe2\x80\x99s\n operations and the results of follow-up efforts to resolve customer service issues.\n\nOpportunities Exist to Increase Parking Revenues by Curbing Free\nParking\n\nFONZ\xe2\x80\x99s parking revenues topped $2.5 million in FY 2006, an increase of nearly $400,000\nfrom FY 2005. The increase mainly reflects growth in the number of Zoo visitors as well as\nthe full-year effect of a 2005 rate hike to a maximum of $16 for parking of three hours or\nmore. We identified two areas FONZ and the Zoo should examine that, in our opinion,\ncould yield even greater revenues from parking. The first involves a reevaluation of the\npolicy allowing free parking for FONZ and Zoo employees and others. The second area\nrequires an examination of the unlimited free parking benefits enjoyed by FONZ\nmembers.\n\nIn reviewing the peer survey responses, we noted that other zoos averaged nearly 2,000\nvisitor parking spaces. In contrast, the National Zoo has fewer than 900 spaces, the second\nlowest in our survey, even though the Zoo\xe2\x80\x99s visitation levels are among the highest of its\npeers. Because of the limited parking spaces available, FONZ\xe2\x80\x99s website advises visitors that\nduring peak months the parking lots fill up early in the morning. Consequently, we\nbelieve that FONZ needs to fully explore opportunities for opening up additional parking\nspaces for paying visitors.\n 7\nOn the first issue, during a fiscal year 2005 audit of parking, we noted six categories of\nvisitors that received free parking: Zoo employees, FONZ employees, FONZ members,\nFONZ volunteers, vendors, and guests attending special events. When totaled, up to\n30 percent of the vehicles parked in the Zoo lots did not pay parking fees. To our knowledge,\nother District-based Smithsonian units do not routinely provide free parking to their\nemployees. In our view, during peak periods, free employee parking at the Zoo should be\nrestricted. During off-peak periods, when parking spaces typically go unused, free\nemployee parking could be allowed as an employee benefit without detriment to parking\nrevenues.\n\nThe second area that needs examination is the unlimited free parking benefits for FONZ\nmembers. We recognize that the relationship between annual membership dues,\nadmission fees, and parking fees is complex. However, the National Zoo is one of only\n\n7\n Parking Operations at the National Zoological Park, No. A-04-09 (December 27, 2004).\n 15\n\x0cthree large zoos that do not charge admission. Moreover, despite a March 2006 rate\nincrease, FONZ charges the lowest dues for household memberships, $55, versus a range\nof $65 to $99 for household/family memberships at the other seven zoos we visited. The\nprimary membership benefit at most of the other zoos was free admission, while FONZ\nmembers cite free parking as one of their most important benefits. We also noted that the\ntwo other large zoos that did not charge admission placed limitations on free parking for\ntheir members. A couple of zoos we visited also were considering eliminating free parking\nas a membership benefit; one of these was discussing only offering free parking to\nmembers during the off-season. In comparison to its peers, about 40,000 FONZ members\nenjoy the lowest annual household membership dues, do not pay admission, and receive\nunlimited free parking.\n\nFONZ officials told us during our audit that FONZ had no current plans to limit free\nparking for its members but will continue to evaluate member parking benefits in the\nfuture. We think the parking issue warrants additional scrutiny. Offering unlimited free\nparking during the off-peak months and limiting free parking to perhaps one or two\nvisits during peak months (with reduced rate parking for additional visits) would be a\ngood way to provide a valued member benefit while also increasing parking revenues.\n\nRecommendations\n\nIn view of the parking constraints at the Zoo, we recommend that the Executive Director,\nFONZ and the Zoo Director, in consultation with the Secretary:\n\n 10. Reevaluate the policy of allowing free parking for FONZ and Zoo employees and\n others.\n\n 11. Reexamine the unlimited free parking benefits enjoyed by FONZ members and\n consider limiting free member parking during the peak months.\n\nGovernance Over FONZ\xe2\x80\x99s Operations Needs Strengthening\n\nFONZ\xe2\x80\x99s external auditors issued an unqualified opinion on FONZ\xe2\x80\x99s financial statements\nfor each year in our review period. And, to its credit, FONZ has generally corrected\ninternal control weaknesses identified by its auditors. However, we identified two areas\nwhere governance over FONZ\xe2\x80\x99s operations can be improved. The first concerns the way\npolicies and procedures are developed and documented. The second addresses how\nFONZ monitors policy implementation.\n\nPolicies and Procedures\n\nIn our opinion, FONZ needs to establish a more disciplined system for developing,\napproving, and documenting formal policies and procedures for its operations. FONZ did\nnot maintain a central file of current, approved policies and procedures. Instead,\nindividual departments were expected to develop their own procedures on an as-needed\nbasis. Further, while FONZ has written policies addressing many activities, most policies\n\n 16\n\x0cwe reviewed were not formally approved by FONZ\xe2\x80\x99s Board of Directors8 nor did they\nevidence executive approval. Formal policies are the tools that management uses to\nefficiently and effectively control its operations, and it is important for the Board to\nformally approve key, overarching policies to steer the organization in the desired\ndirection and set the tone from the top. In our view, it is also important for departmental\npolicies and procedures to document executive-level review and approval.\n\nWhen we asked department managers for copies of their policies and procedures, in some\ncases we were told that the documents were either being revised or had not been\ndeveloped. For example, when we requested operating policies on merchandise buying\nand retail pricing guidelines, FONZ prepared a summary of procedures in use rather than\nproviding us with formally approved written policies and procedures. Additionally, while\nthe food and beverage operation uses a competitive bidding process, there was no written\npolicy requiring and outlining that process. Also, at the time of our request for written\nprocedures, FONZ did not provide us with bank reconciliation procedures and was not\nconsistently performing bank reconciliations in a timely manner. They have since\nimplemented detailed monthly reconciliation procedures.\n\nFONZ also could not provide written policies on access control restrictions for its\nfinancial systems. At the time of our review, FONZ allowed full access to its financial\nsystem by most business office staff. FONZ\xe2\x80\x99s recently hired controller stated that he did\nnot believe the financial system allowed for journal access to be restricted once a user was\nin the system. However, FONZ indicated that there were mitigating controls in place such\nas the monitoring and approval of journal entries and reconciliations. While we agree that\nsome mitigating controls exist, we believe that segregation of duties could still be\nstrengthened.\n\nThe lack of proper segregation of duties and system access restrictions creates an undue\nrisk that an individual with custody of assets could make accounting entries to hide theft\nof funds or to cover up shoddy or incomplete books of account. For example, we noted in\nFONZ\xe2\x80\x99s payroll policy one person was assigned payroll duties, but had full access to the\naccounting system. A payroll technician who prepares the payroll and authorizes\ndisbursement of funds should be restricted from access to the accounting records. At a\nminimum, this policy should require that another employee enter payroll transactions\ninto the financial system and a supervisor should review and authorize the transaction.\nBest practices require system access levels to be restricted to the minimum necessary to\n 9\nperform required job duties. While we recognize that it is difficult for a small office to\nmaintain complete segregation of duties, we believe FONZ has room to strengthen\ncontrols by reducing system access privileges for some business office staff.\n\n\n\n\n8\n FONZ\xe2\x80\x99s Board of Directors comprises 24 volunteers from various distinguished backgrounds. The Board,\n through its six committees, supports FONZ\xe2\x80\x99s mission to enhance and promote conservation, education\n9\n and science at the National Zoo.\n For example, Appendix III to OMB Circular A-130, Security of Federal Automated Information Resources\n addresses restrictions on system access levels.\n 17\n\x0cOversight of Policy Implementation\n\nFONZ\xe2\x80\x99s Board could better document the results of its meetings, and the Finance and\nAudit Committee should strengthen its oversight of FONZ\xe2\x80\x99s internal controls. FONZ\ncould not provide the minutes of its Board meetings for four months of our review\nperiod. Further, many Board minutes they did provide were labeled draft and did not\nhave signature approval, and therefore we could not determine if these minutes were\nfinal. We noted that most draft minutes included a statement of approval of the prior\nmonth\xe2\x80\x99s minutes. In addition, FONZ could not provide any minutes for its Finance and\nAudit Committee meetings.\n\nThe Finance and Audit Committee is responsible for budget review, financial statement\noversight, internal controls oversight, and investment activity. We identified two areas\nwhere committee oversight could be improved. First, during our review of FONZ\xe2\x80\x99s\nexternal auditor\xe2\x80\x99s work papers, we noted that the committee asked FONZ\xe2\x80\x99s former\nExecutive Director to perform a risk assessment and submit a written report on the\nmitigating controls that were in place. While FONZ\xe2\x80\x99s former Executive Director told us\nthat FONZ completed an assessment, he could not provide any written documentation of\nthe assessment findings or any related actions taken in response, nor did we find any\nmention of the assessment results in the Board minutes we reviewed.\n\nSecond, while FONZ did develop investment policies, it was not consistently following\nthem. As an example, the investment policy requires the committee to meet quarterly,\nwhich they did not. Moreover, FONZ\xe2\x80\x99s operating personnel, rather than a committee\nmember, received investment reports and had apparent authority to direct investments.\nIn 2004, after carefully considering proposals from investment firms, the Board approved\nU.S. Trust as FONZ\xe2\x80\x99s investment broker. U.S. Trust established client objectives based on\ndiscussions with FONZ. These objectives identified an investment time horizon of \xe2\x80\x9cat\nleast 3 to 5 years.\xe2\x80\x9d This objective conflicts with FONZ\xe2\x80\x99s policy requiring capital reserves to\nbe classified in the following manner: up to 1 year, 1 to 5 years, and over 5 years. Because\nthe \xe2\x80\x9cat least 3 to 5 years\xe2\x80\x9d designation does not fit within FONZ\xe2\x80\x99s policy classifications, it is\ndifficult to assess policy compliance.\n\nToday\xe2\x80\x99s increased public scrutiny of nonprofit organizations requires greater oversight of\noperations by their Boards as well as by top management. FONZ\xe2\x80\x99s Board and executive\nmanagement need to ensure that they adopt appropriate policies and procedures and\nimplement them in accordance with the needs of the organization.\n\nRecommendations:\n\nWe recommend that the Executive Director, FONZ:\n\n 12. Establish a more disciplined system for developing, approving, and documenting\n formal, written operational policies and procedures and provide oversight to\n ensure that policies and procedures are implemented as designed.\n\n\n\n 18\n\x0c 13. Ensure a proper segregation of duties in financial operations and restrict financial\n system access to the greatest extent possible.\n\nWe recommend that the FONZ Board of Directors:\n\n 14. Direct the Executive Director to document a thorough risk assessment and report\n to the Board on FONZ\xe2\x80\x99s system of mitigating controls.\n\n 15. Implement oversight procedures in accordance with FONZ\xe2\x80\x99s investment policies.\n\nZoo Master Plan - Vision for the Future\n\nThe Zoo has been developing a ten-year master plan since early 2005. The master plan is\nessentially a blueprint for updating the Zoo\xe2\x80\x99s infrastructure and revitalizing its exhibits to\nprovide every Zoo visitor with a world-class educational, exciting, and enriching\nexperience. Preliminary cost estimates range from $500 million to $600 million. The Zoo\nexpects funding to be shared between federal and private sources. Since the Zoo resides\nwithin the National Capital Region, various agency reviews are required, such as by the\nNational Capital Planning Commission (NCPC). The NCPC is the central planning\nagency for the federal government and seeks to protect and enhance the extraordinary\nhistorical, cultural, and natural resources of the nation's capital. According to the\nSmithsonian\xe2\x80\x99s Office of Facilities Engineering and Operations (OFEO), the NCPC must\napprove the master plan before it can be implemented.\n\nBecause this audit focused on revenue-generating activities at the Zoo, we held\ndiscussions with Zoo, FONZ, and OFEO representatives to determine the extent to which\nrevenue-generating operations were being reflected in the master plan. According to these\nofficials, the master planning process was still in its initial stages, and they had\nconcentrated their efforts on infrastructure renewal and facilities. While consultants did\nperform some studies on visitor amenities and FONZ is a member of the master planning\nteam, the team was not focused on revenue operations. According to OFEO, the master\nplan process is more of a broad-brush approach and is not intended to be the end of the\nplanning process. The needs identified in the approved master plan will feed the\ndevelopment of more detailed capital project plans. In our opinion, the team should fully\nintegrate revenue operations into the master planning process from the outset to\nmaximize future revenue contributions for the Zoo\xe2\x80\x99s conservation and education\nprograms and to develop outstanding visitor services.\n\nWe recognize that FONZ and the Zoo need to make difficult decisions in balancing\nexpansion of animal exhibit space with the need to maximize revenues from concessions\nand other visitor amenities that support Zoo operations. Prior Zoo Directors chose to\nfocus heavily on animal exhibits, which restricted FONZ\xe2\x80\x99s ability to generate revenues for\nthe Zoo\xe2\x80\x99s programs. For example, according to FONZ, proposed retail space was\neliminated in the Zoo's planning and design of the Kids\xe2\x80\x99 Farm and Asia Trail I to enhance\n\n\n\n\n 19\n\x0cthe footprint for animals and exhibits. Now, according to Zoo and FONZ officials, paths\nalong Asia Trail I are not wide enough for peak visitation, severely restricting the space\navailable for visitor amenities.\n\nFONZ\xe2\x80\x99s Executive Director is currently trying to add certain amenities to the new Asia\nTrail II project, because they were not fully incorporated in the capital project plan from\nthe outset. Consequently, the completion of these amenities will lag beyond the rest of the\nproject and will potentially result in a less integrated visitor experience. Additionally, late\nscope changes usually cause delays, increase costs, and create uncertainty and challenges\nwith acquiring necessary approvals from NCPC and other government entities. OFEO\nagrees that it is crucial to fully integrate revenue operations early in the master planning\nbecause all positive and negative impacts from these facilities must be taken into account.\n\nWe identified four areas that the Zoo, FONZ, and OFEO should examine more fully in\nthe early stages of planning because they could substantially increase future revenues and\nenhance the quality of the visitor experience: the expansion of retail facilities, the\nexpansion of food and beverage operations, the expansion of parking facilities, and the\naddition of entertainment amenities that have proven successful at other zoos.\n\nExpand Retail Facilities. Based on information in a\n2002 study performed by a FONZ consultant and\n 10\nusing projected visitation figures of three million,\nwe project that by 2016 about 11,000 to 12,000\nsquare feet of retail space \xe2\x80\x93 three times the existing\nfacilities \xe2\x80\x93 will be needed. A 2005 consultant\xe2\x80\x99s\nstudy also found FONZ\xe2\x80\x99s existing retail\nconfiguration deficient. Further, a more recent\n2006 National Zoological Park Entry and\nTransportation Capacity Assessment noted that\nabout 15,000 square feet of retail space would be\nrequired to accommodate the same visitation\nlevels, assuming various Metro shuttle alternatives.\nAccordingly, we believe that the master planning\n Toledo Zoo\xe2\x80\x99s retail space located near an animal\nteam should fully consider the Zoo\xe2\x80\x99s retail space exhibit features exhibit-related items and other\nneeds in all phases of its redesign of the Zoo. The merchandise\n\ndesign, size, and locations of the retail space are crucial to efficient visitor traffic flows,\nhigh capture rates, and an enjoyable visitor experience and, consequently, the ability to\nmaximize retail revenue. The design and location of the retail space needs to be\nstrategically selected to complement and further the Zoo\xe2\x80\x99s educational and conservation\nthemes and, according to experts we talked to, should be situated as close to exhibits as\npossible.\n\n\n\n\n10\n Projected visitation of three million is based on the Traffic, Parking and Visitation Study presented in\n April 2006 to the Master Plan team.\n 20\n\x0cExpand Food and Beverage Operations. The Zoo\xe2\x80\x99s master planning process should\ninclude greater consideration of the need to expand food and beverage operations, with\nan emphasis on special events facilities that include catering amenities. Many of the zoos\nwe surveyed indicated that the largest opportunities for revenue growth were from\ncatering for special events, particularly those of a personal nature such as weddings,\nbirthdays, retirements, and reunions. Other zoos have structures that range from large\nmulti-purpose permanent dining facilities to outdoor covered pavilions that can be\nconfigured for picnics or formal occasions. In some cases, corporate donors provided\nmuch of the capital to build the facilities.\n\n\n\n\n Saint Louis Zoo\xe2\x80\x99s dining facility with indoor and outdoor seating can also be converted to host special events\n\nThese zoos reported 2005 food and beverage revenues from catering in the hundreds of\nthousands of dollars. One zoo with in-house catering earned revenues of over $1 million,\nand some zoos reported a very robust and growing demand for these facilities. In contrast,\nFONZ reported 2005 revenues from catering of only $44,000. FONZ is unable to provide\nmuch in-house catering for events due to its limited facilities. However, FONZ does host\nmany corporate picnics and parties which are held in rented tents, outdoor areas, and\n animal or educational buildings, primarily\n using outside caterers. In 2005, FONZ\n generated $564,000 in revenue from\n hosting picnics and parties. FONZ\xe2\x80\x99s\n Executive Director noted that FONZ hosts\n over 110 of these events each year. This\n further supports our supposition that\n there is a high demand for special event\n facilities with the potential for generating\n additional profits by providing the catering\n as well.\n Saint Louis Zoo\xe2\x80\x99s visitor center may be converted to host\n special events (the building also contains kitchen facilities)\n In our opinion, having world-class special\nevent facilities will not only benefit FONZ and the Zoo by generating sizeable profits for\neducation and conservation efforts, but will also enhance fundraising efforts by building a\nbroader public appeal. Increasing such uses also aligns closely with FONZ\xe2\x80\x99s recently\npublished goals and strategic priorities to \xe2\x80\x9cdevelop and host events that attract expanded\naudiences, strengthening the affiliation of the public with the Zoo\xe2\x80\x9d and \xe2\x80\x9cstrengthen and\nexpand partnerships with corporate, governmental, non-profit, and educational entities.\xe2\x80\x9d\n\n 21\n\x0cWe recognize that to expand catering and special events, FONZ and the Zoo will either\nneed to obtain a waiver from the Smithsonian Secretary or succeed in modifying\nSmithsonian policy that restricts the use of\n 11\nSmithsonian facilities for social events. We note\nthat the Institution has granted waivers to the\nCooper-Hewitt National Design Museum to host\nweddings. In our discussions about removing the\npolicy restrictions on hosting social events for the\nZoo, management expressed many concerns,\nincluding, in part, additional labor costs to run\nthe events; facilities security and maintenance\nexpenses; payment of unrelated business income\ntax; maintaining political neutrality; over-\ncommercialization; and animal welfare. While\nthese are all valid and significant concerns, we\nbelieve that the proper design and location of the\nfacilities \xe2\x80\x93 integrated early in the master planning\nprocess \xe2\x80\x93 combined with appropriate policy\nrestrictions (on political functions for example) Saint Louis Zoo\xe2\x80\x99s semi-permanent tent facility used to\ncan mitigate these concerns. Certainly, a credible host special events during the period April \xe2\x80\x93 October\nbusiness plan will need to be developed that makes a compelling case for the expansion.\nThe Zoo should carefully reexamine this issue and its full potential for the long term.\n\nExpand Parking Facilities. The Zoo must provide for substantially increased parking\nfacilities or other convenient transportation alternatives in its master plan if it expects to\nattract visitors at the levels projected and deliver a world-class visitor experience.\nNevertheless, according to discussions with the Zoo\xe2\x80\x99s Deputy Director and other\nmembers of the planning team, the master plan will not provide much additional visitor\nparking, and employee parking will be problematic as well. We noted that a master plan\nstudy on parking concluded that at least 2,000 spaces are needed to accommodate\nthe projected attendance levels. And, even with 2,000 spaces, there will still be some days\nwhen parking will be insufficient. Yet, the master plan alternatives being considered\nranged from no net increase to an increase up to 1,200 total spaces. The overarching\nassumption is that future attendance will need to be increasingly dependent on public\ntransit. We noted that parking facilities are inadequate during peak times for existing\nattendance levels of about 2 million. At projected levels of 3 million, demand would\nexceed existing parking facilities for more than 4 months of the year.\n\nPublic transportation has been readily available for many years and surveys have shown\nthat about one-fifth to over half of Zoo visitors already use it. Some studies have also\ndemonstrated that nearly two-thirds of visitors used their cars to visit the Zoo. Families\nwith young children, seniors, and people with physical limitations may have difficulty\nusing public transportation to visit the Zoo. During our visit to the Philadelphia zoo,\nofficials lamented that \xe2\x80\x9ctheir biggest limitation to increasing visitation is parking,\xe2\x80\x9d a\n\n11\n Smithsonian Directive 401 restricts the use of Smithsonian facilities when the primary purpose is social in\n nature, such as weddings, birthdays, or retirement parties.\n 22\n\x0ccommon theme at many of the zoos we visited. In keeping the world-class goal in mind,\nthe Institution needs to reexamine the parking issue and fully evaluate the detrimental\neffects of not providing sufficient parking or viable alternatives for all of its patrons.\n\nAdd Amusement and Entertainment Amenities. While the Zoo is considering adding a\ncarousel, specifics for entertainment amenities continue to evolve as part of the master\nplanning process. We would urge the Zoo to commit to adding a carousel to its planned\n\n\n\n\n Carousel at the Columbus Zoo - Carousels could include\n Toledo Zoo\xe2\x80\x99s seated amphitheater hosts concerts and\n sponsored animals and rocking chairs, attached birthday party\n other special events\n room, and year-round enclosure\n\namenities. We note that other zoos are making substantial profits on carousels as well as\nsimulators, concert pavilions and amphitheaters, train rides, seated animal rides, paddle\nboats, and movie theaters. These amenities not only bring in needed financial\ncontributions, they substantially enhance the enjoyment and educational experience for\nzoo visitors.\n\nCurrent draft master plan alternatives include options for a carousel as well as an aerial\ntram or a surface tram/bus to transport visitors around the Zoo. We note that nearly\nevery zoo we visited had a carousel and some type of train ride. These particular amenities\ncombined earned hundreds of thousands of dollars in free cash flow each year.\nAdditionally, in many cases, donors contributed all the capital costs. Financing also may\nbe structured to periodically bring in renewed capital contributions. Moreover, given the\nsize and hilly terrain of the National Zoo, most visitors would benefit from some type of\ntransportation option to navigate the Zoo\xe2\x80\x99s widely dispersed exhibits. Well-chosen stops\n\n\n\n\n Zoo Atlanta\xe2\x80\x99s train ride to see exhibits Lincoln Park Zoo\xe2\x80\x99s trackless children\xe2\x80\x99s train requires little space\n\n\n 23\n\x0ccould be matched to key exhibits and be co-located with merchandise and food facilities\nto further enhance visitor convenience. Some other zoos also had either train rides that\ncircled exhibits and provided an educational tour or small trackless train rides for\nchildren.\n\nRecommendations\n\nTo increase future revenues and enhance the quality of the visitor experience, we\nrecommend that the Directors of the Zoo and OFEO, and the Executive Director, FONZ,\nin consultation with the Secretary:\n\n 16. Fully examine the following options during the master planning process:\n\n a. Expand existing retail facilities to accommodate expected visitation levels\n and locate new facilities to maximize revenue and convenience for zoo\n visitors.\n\n b. Expand food and beverage operations, especially catering and special event\n facilities, and obtain needed waivers or modify policy restrictions on\n hosting social events at the Zoo.\n\n c. Fully document ways that future attendance levels will be accommodated\n either through increased parking or other transportation alternatives.\n\n d. Add amusements and entertainment amenities, particularly a carousel and\n some type of train ride or tram throughout the Zoo to enhance future\n revenue streams and the enjoyment and educational experience for Zoo\n patrons.\n\n\n\n\n 24\n\x0cObservations on the FONZ-Smithsonian Agreement\n\nFONZ and the Smithsonian signed an agreement in 2003 that established responsibilities\nand expectations for FONZ as well as various Smithsonian stakeholders. Two issues came\nto our attention during our review that we believe merit management attention. First, the\nagreement assigns SBV the primary responsibility for Smithsonian management oversight\nof all FONZ-managed concessions, requires SBV to review and approve any changes in\nmenu, portions presentation, or prices proposed by FONZ. In addition, it requires SBV to\napprove in advance any contract for third-party vendors to provide retail sales services.\nFinally, it requires SBV to perform an annual review of FONZ\xe2\x80\x99s preventive maintenance\nprogram for equipment used by FONZ in its concession activities.\n\nWe found that SBV provided little oversight during the period covered by our audit. In an\ninterview, SBV\xe2\x80\x99s former Chief Operating Officer indicated that SBV put forth\nlittle effort for FONZ. While SBV did provide reviews of parking rates, a food concession\nproposal, and other areas, SBV\xe2\x80\x99s former Chief Financial Officer acknowledged that SBV\nhad minimal involvement with FONZ and had not provided the level of oversight\nexpected in the agreement. Neither SBV nor FONZ were able to provide documentation\nof any ongoing oversight activities.\n\nThe second issue concerns a provision in the agreement that requires FONZ to pay an\nannual concession fee of four percent of gross merchandise and food sales to the\nSmithsonian. The agreement, as written, is unclear regarding the intent of this concession\nfee or where within the Smithsonian FONZ should pay it. In practice, FONZ has been\nmaking the payments to SBV, and SBV has included the payments as revenue for\npurposes of calculating its net gain. We noted that between 2003 and 2006, the cumulative\nfees amounted to $1.2 million. In 2006, for example, the fee was $383,000, and it reduced\nFONZ\xe2\x80\x99s total merchandise and food net contribution to the Zoo by 12 percent.\n\nAfter reading the agreement, we assumed that the concession fees were in exchange for\nSBV\xe2\x80\x99s required oversight services. However, when we questioned Zoo and FONZ officials\non the rationale for the payments, they indicated that the fees were designed primarily to\noffset services provided by the Smithsonian, such as security, IT equipment and support,\nutilities, and executive overhead. In our view, if the fees were for SBV oversight, it\ncertainly appears that FONZ has not received commensurate value for its money. If they\nwere for Smithsonian support services, then the fees should have been paid directly to the\ncentral trust fund, not funneled through SBV. We suggest the agreement be amended to\nclarify what the concession fees are for and specify both where the payments are to be\nmade and the basis for the payments, as appropriate.\n\n\n\n\n 25\n\x0cSummary of Management Response\n\nFONZ\xe2\x80\x99s June 18, 2007 and the Zoo\xe2\x80\x99s June 15, 2007 responses to our draft report generally\nagreed with the report\xe2\x80\x99s findings and 15 of our 16 recommendations. Management noted\nthat many of the recommendations have been actively addressed or were in the process of\nbeing addressed over the past year by new FONZ management. FONZ has improved its\noperations by reducing nonproductive inventory, enhancing its store presentation,\nexpanding cart and tent food offerings, strengthening customer service training, and\nemploying a more effective strategy for staffing facilities. FONZ indicated that it will\ncontinue to use all information and report recommendations to improve FONZ revenue\noperations and support for the Zoo.\n\nThe FONZ Board did not concur with our recommendation regarding the lack of Board\noversight on investment policies. FONZ\xe2\x80\x99s Executive Director also expressed two chief\nconcerns regarding our observations on FONZ\xe2\x80\x99s financial measures. First, FONZ\nquestioned the methodology we employed in comparing FONZ with other zoos because\nwe could not address factors such as differences in size of usable zoo property for parking,\namenities, and exhibit space, as well as differences in zoo philosophies regarding zoo\namenities or differences in labor and other costs. Second, FONZ noted that the focus of\nour financial analysis was the period 2003 through 2005 and that because the audit period\nwas dated, the report may give readers the impression that it reflects current conditions\nand practices.\n\nSince we received the responses in June, we held several follow-up meetings with Zoo and\nFONZ officials to clarify areas of concern and reach resolution on as many issues as\npossible, including more details on actions to be taken and target dates for\nimplementation. Management also provided us with substantial, additional\ndocumentation to supplement their formal responses, and our summary comments\nincorporate this additional information. Management\xe2\x80\x99s planned actions are as follows:\n\nRecommendation 1. FONZ partially concurs. While FONZ agrees that performing\neffective analyses is important to ensure optimum stock levels, it does not believe that a\nspecific inventory management tool -- a detailed inventory aging report -- is necessarily\nthe best way to improve inventory management. FONZ has committed to improving its\ninventory management and provided information on significant actions it implemented\nduring the latter part of our audit. FONZ improved its inventory turnover rate from 2.7\nin 2005 to 3.5 in 2006. Moreover, it performed an inventory analysis at the end of 2006\nand has taken steps to streamline its inventory. According to FONZ, it reduced inventory\nlevels from a high of $1.3 million in 2003 to less than $700,000 as of June 2007. In\naddition, FONZ reviews monthly inventory reports to ensure its best sellers are properly\nstocked and slow selling items are marked down. FONZ also retains an outside consultant\nto analyze inventory activity and provide advice on a quarterly basis.\n\n\n\n\n 26\n\x0cRecommendation 2. FONZ concurs. In March 2007, FONZ increased the retail markups\non a number of items and indicated that its COGS was consistent with the zoo peer\nsurvey average. FONZ will continue to review its purchase costs as well as its markup\npractices. To reduce purchase costs, FONZ has initiated contact with SBV and set a target\ndate of December 31, 2007, to explore joint purchasing opportunities.\n\nRecommendation 3. FONZ concurs. FONZ\xe2\x80\x99s Executive Director agrees that retail carts,\ntents, and other temporary structures are important to supplement FONZ\xe2\x80\x99s limited store\nspace. FONZ\xe2\x80\x99s gift shops have expanded the use of mobile carts around the Zoo, and sales\nfrom temporary outlets were almost 12 percent of total in-park revenues in 2006. FONZ\nwill continue to use these sales outlets to the extent practicable given limitations on\nelectricity and network connectivity as well as pedestrian traffic flows and park aesthetics.\nFurther, FONZ and the Zoo are planning for an expanded retail presence on Asia Trail II.\n\nRecommendation 4. FONZ concurs. FONZ held discussions with its retail consultant and\ndiscussed staffing levels with two other zoos. FONZ concluded that staffing structures\nvary considerably among zoos and that a strict comparison of staffing numbers is difficult.\nBased on FONZ\xe2\x80\x99s unique operations, i.e., the distance between shops, warehouses, and\noffices at the Zoo, the fact that merchandise management and staff routinely assist other\nzoo departments and support special events, and FONZ\xe2\x80\x99s significant on-line and seasonal\nmall store presence, FONZ believes that its permanent staff structure is balanced and\nappropriate.\n\nRecommendation 5. FONZ and the Zoo concur. According to the Executive Director,\nFONZ\xe2\x80\x99s Board of Directors sets aggressive financial targets in the annual budget process\nfor revenue and net contributions. For 2007, FONZ\xe2\x80\x99s budget assumed only a 6 percent\ndrop in concessions revenue from 2006 despite its forecast of an 11 percent drop in\nvisitation, reflecting recently implemented operating improvements. Regarding the\nfeasibility of outsourcing, FONZ\xe2\x80\x99s Board recently re-examined its merchandise operations\nand recommended against outsourcing.\n\nRecommendation 6. FONZ concurs. FONZ recognizes the particularly difficult challenge\nin its recruitment of concessions staff. In 2007, FONZ expanded recruitment efforts by\nenhancing job fairs and developing an affinity program to connect the seasonal workforce\nmore closely to the Zoo itself. FONZ also offered incentives to existing workers to recruit\nfriends and colleagues, attended university job fairs, and partnered with community\norganizations. FONZ will continue to seek ways to provide its guests with a wider variety\nof food items at the smaller locations, including the use of third-party concessionaires.\n\nRecommendation 7. FONZ concurs. FONZ has expanded its use of third-party\nconcessionaires for supplemental food services. In 2007, FONZ negotiated two seasonal\ncontracts covering five different locations around the Zoo and awarded four short-term\ncontracts with local restaurants during the peak spring period to help with service and\nvariety. Through third-party concessionaires, FONZ provided Zoo guests with more food\noutlets and a greater variety of food and beverage services, such as gelato, fresh-squeezed\nlemonade, cotton candy, and gourmet coffee. FONZ will continue to evaluate the\neffectiveness of short-term versus long-term durations of these contracts.\n 27\n\x0cRecommendation 8. FONZ and the Zoo concur. FONZ contracted with an outside firm\nthat specializes in customer service to assist FONZ in changing its culture to one that\nstresses exemplary customer service. In April 2007, FONZ directors and key employees\nparticipated in an interactive workshop to intensify their focus on customer service\ntraining and performance. FONZ developed a customer service theme, standards, and\nbehaviors that will be used to establish a customer service training program for all\nemployees. FONZ expects to complete the development of the training program by\nSeptember 30, 2007, and a newly formed strategic committee of FONZ\xe2\x80\x99s Board will\nprovide oversight of improvements in customer service.\n\nRecommendation 9. FONZ partially concurs and the Zoo concurs. FONZ asserted that it\nfollows up and resolves all customer complaints it receives and indicated that it would be\na significant administrative burden to establish a formal process for tracking all visitor\ncorrespondence including emails, comments cards, and letters. FONZ has agreed to\nmonitor customer feedback primarily through two vehicles: secret shopper reports and a\nnew visitor survey. FONZ indicated that scientific surveys of visitor satisfaction with\nsound statistical analysis of the data are a far superior way of obtaining customer feedback\nand identifying both problems and areas of excellence. FONZ has been working closely\nwith the Smithsonian Office of Policy and Analysis to design and implement a series of\nstandardized visitor surveys to establish baseline levels of visitor satisfaction with\ncustomer service and monitor them over time, conducting surveys two to three times a\nyear.\n\nRecommendation 10. FONZ and the Zoo concur. Both are committed to developing a\nstrategy for implementing employee parking fees in the future as part of the ongoing\nfeasibility study (economic analysis by the parking task force) for a parking garage at the\nZoo. The Zoo Deputy Director noted three large events that are scheduled for 2008 \xe2\x80\x93\npreparations for Association of Zoos and Aquariums (AZA) accreditation,\nimplementation of the new Zoological Information Management System, and FONZ\xe2\x80\x99s\n50th Anniversary \xe2\x80\x93 that will substantially increase employee workloads. The Zoo and\nFONZ are concerned that announcing plans now to implement paid parking for\nemployees would reduce productivity at a critical time. In addition, because\nimplementing paid parking would be considered a change in working conditions, the\nAmerican Federation of Government Employees union will need to be involved, and these\nmatters usually take considerable time to resolve. The Zoo and FONZ have committed to\nwork with the Smithsonian\xe2\x80\x99s Secretary to reevaluate the parking policy for FONZ and Zoo\nemployees and develop a strategy for implementing employee parking fees by\nDecember 31, 2009.\n\nRecommendation 11. FONZ concurs. Zoo officials defer to the FONZ Board. The FONZ\nBoard examined membership rates and benefits, including free parking, in early 2006. The\nBoard increased dues for selected membership levels in 2006 and is not inclined to pursue\nsuch a re-examination now because the new membership rates are just completing the\nfirst cycle. As with recommendation 10, FONZ\xe2\x80\x99s Board will reconsider member parking\nbenefits by December 31, 2009, as part of the parking garage feasibility study.\n\n\n\n 28\n\x0cRecommendation 12. FONZ concurs. While FONZ agrees that a more systematic\napproach to developing and recording operating policies may be in order, its limited\nresources mean that other, higher priorities need be addressed first. Nevertheless, by\nDecember 31, 2008, the FONZ Board will work with the Executive Director to prioritize\nthe areas for which written policies and procedures should be developed. FONZ will\ndevelop and approve policies and procedures for these areas by December 31, 2010, and\nthe Board will provide oversight to ensure implementation.\n\nRecommendation 13. FONZ concurs. FONZ believes that it has implemented a proper\nsegregation of duties and appropriate access controls considering the small size of its\norganization. FONZ hired a new Controller, who established a process for supervisory\nreview and approval of all journal entries and bank reconciliations. FONZ also noted that\nits outside auditors did not find any weaknesses in FONZ\xe2\x80\x99s control environment in fiscal\nyear 2006.\n\nRecommendation 14. FONZ concurs. By December 31, 2008, the Board, working with\nthe Executive Director, will determine the areas for which risk assessments should be\ndeveloped. FONZ will complete the risk assessments and report to the Board on its system\nof mitigating controls by December 31, 2010. The Board will provide oversight to ensure\nthat mitigating controls are implemented.\n\nRecommendation 15. FONZ does not concur. The Board believes that it has exercised\nappropriate oversight of FONZ\xe2\x80\x99s investment policies.\n\nRecommendation 16. The Zoo Director and FONZ concur. The Zoo stated that revenue-\ngenerating opportunities and transportation alternatives have been an integral part of the\nmaster planning process and indicated that the design team used external consultants to\nfocus on these areas in the development of the master plan document. OFEO also agreed\nthat the master planning team should fully integrate revenue operations into the master\nplan design from the outset. The draft master plan, recently issued for public comment,\nincludes options that best fit animal care, staff, and visitor amenities. The final master\nplan will also reflect input from top Smithsonian officials as well as the Board of Regents.\nOfficials acknowledged that implementation of the master plan will be a multi-year\nprocess and that specific details for revenue-generating opportunities will require a\nbusiness plan to determine the capital costs and how they can be recovered, as is currently\nbeing done for the proposed multilevel parking garage.\n\nWe include the full text of management\xe2\x80\x99s response as Appendix C.\n\n\n\n\n 29\n\x0cOffice of the Inspector General Comments\n\nDuring our audit, the FONZ Board named a new Executive Director to oversee FONZ\xe2\x80\x99s\noperations. In addition, FONZ management, working closely with the FONZ Board,\nadopted a new strategic plan to improve the visitor experience, enhance partnerships with\nstakeholders, and achieve organizational excellence. We briefed FONZ and Zoo officials\non our findings during the audit and observed that the new Executive Director has made\nmany improvements in FONZ\xe2\x80\x99s revenue operations over the past year. For example, we\nhave seen a marked improvement in overall store presentation and tidiness, staff\nfriendliness towards visitors, and an increase in the availability of food services.\n\nComments on Responses to Specific Recommendations\nManagement\xe2\x80\x99s actions taken and planned respond to the intent of our recommendations\nand we consider them resolved. For recommendations 1, 3, 4, 6, 7, and 13, management\nhas substantially completed the actions to improve FONZ\xe2\x80\x99s revenue operations, and we\nconsider these recommendations closed. Regarding recommendation 15, FONZ\xe2\x80\x99s Finance\nand Audit Committee recently briefed the FONZ Board regarding the status of its\ninvestments and is reevaluating FONZ\xe2\x80\x99s investment strategy. Based on information\nprovided to us on the Board\xe2\x80\x99s oversight of investments, we consider this recommendation\nclosed as well. However, on the issue of keeping minutes for committee meetings, we note\nthat the June 2007 Report of the Governance Committee to the Board of Regents directed the\nInstitution to enhance the transparency of the Board of Regents\xe2\x80\x99 operations and\ndeliberations by directing it and its committees to keep minutes for all meetings,\nincluding executive sessions. We urge FONZ\xe2\x80\x99s Board to adopt this best practice and keep\nminutes of all Board and committee meetings.\n\nTo fully address recommendations 10 and 11 regarding the free parking policy for Zoo\nand FONZ employees as well as FONZ members will require vetting by the Secretary and\nBoard of Regents. Also, while FONZ concurred with recommendation 12, in subsequent\ndiscussions FONZ indicated that formal written purchasing policies and procedures were\nnot necessary for the food and merchandise departments because these were very thinly\nstaffed offices. In our view, it is especially important to document policies and procedures\nfor these departments because merchandise and food services are FONZ\xe2\x80\x99s two largest\nrevenue-producing operations and because such documentation promotes transparency\nand assists succession planning.\n\nManagement stated they have taken actions that satisfy recommendations 5, 9, and 16,\nand that these recommendations should be closed. We do not agree.\n\nIn recommendation 5, we suggested that FONZ establish aggressive financial targets for\nrevenue and net contribution growth and explore all options, including the feasibility of\noutsourcing merchandise operations, for achieving these targets. According to FONZ, its\nBoard does set aggressive financial targets and cites the approved 2007 budget as an\nexample. However, FONZ provided little detail on how it set this goal or why. Moreover,\nif they are expecting an 11 percent decline in visitation, we fail to understand how a goal\nof a 14.5 percent decline in net contribution is an aggressive target.\n\n 30\n\x0cAs for the outsourcing part of our recommendation, we understand that the FONZ Board\nrecently re-examined this issue and recommended against it. In response to our requests\nfor the details of the Board\xe2\x80\x99s analysis, FONZ provided us letters from the Zoo Director\nand the FONZ Executive Director to the Acting Secretary, which conclude that because\nFONZ is generating significant operating profits and its retail operations personnel are\nembedded in other operational activities, the Zoo would have to hire replacement\nemployees for some Zoo services such as education programs, visitor services and the\nZoo\xe2\x80\x99s website. FONZ did not provide any trend analyses of detailed metrics such as sales\nper visitor, visitor capture rates, and expense per dollar of sales. Since the Finance and\nAudit Committee did not retain minutes of its meetings and the full Board minutes were\nat a summary level, it could not provide us with any details on its deliberations.\n\nTo its credit, FONZ has drafted an operational plan for the 2007 to 2010 period that\ncontains steps for enhancing its customer service program, improving merchandise and\nfood services, and increasing membership. However, the version provided to us did not\ninclude developing a longer-term financial plan that is tied to its operational plan and\nfuture annual budgets so the Board can better measure financial progress and make a\nmore informed decision on the outsourcing issue.\n\nWe will keep this recommendation open until FONZ can provide more detailed\ninformation on its financial targets. We request that by February 28, 2008, FONZ provide\nus with its approved 2008 budget along with information on the key metrics that it used\nto measure financial performance and how the metrics are linked to aggressive targets in\nits budget as well as the longer term.\n\nOn recommendation 9, we applaud management for working with the Office of Policy\nand Analysis to develop a more scientific visitor survey to establish a baseline to gauge\ntrends in customer service. These surveys and secret shopper reports should provide\nmanagement with excellent information to implement improvements where needed.\nHowever, we do not plan to close this recommendation until the 2007 surveys and secret\nshopper reports are completed and analyzed. Moreover, we want to observe how well\nFONZ documents its follow-up efforts to resolve visitor complaints and other customer\nservice issues raised in the surveys. We have established a target date of January 31, 2008.\n\nRegarding recommendation 16 on the master plan, by the time the plan is finalized and\napproved (by June 2008), FONZ and the Zoo will have fully considered the expansion of\nretail facilities, special events facilities, parking alternatives, and amusements and\nentertainment amenities. We understand that the Zoo would like this recommendation\nclosed, but we will keep it open until the master plan has been finalized. We expect the\nZoo and FONZ to weigh all options and document their decision-making.\n\nWe recognize the difficult challenge in balancing the Zoo Director\xe2\x80\x99s resolve to expand the\nfootprint for animal exhibits with the need to maximize revenues from concessions and\nother visitor amenities. It is critical to consider the costs of sustaining the new animal\nexhibit areas along with the need to self-fund operations to the maximum extent, given\nfederal budget constraints. The Zoo currently suffers from lost revenue opportunities and\ndiminished visitor amenities because of prior decisions to expand exhibit space at the\n 31\n\x0cexpense of up-front planning for visitor services. We plan to keep this recommendation\nopen until the Secretary and Board of Regents review this matter and the final master plan\nreceives the required approvals (projected for June 2008). We expect that the Zoo, OFEO,\nand FONZ will weigh the benefits and costs for all options and document their analyses.\n\nComments on Responses Regarding General Issues\nFinally, we would like to address FONZ\xe2\x80\x99s two biggest concerns: our survey methodology\nand the age of our data.\n\nFONZ\xe2\x80\x99s chief concern with our methodology for comparing FONZ with other zoos is that\nour analysis did not factor in significant differences among zoos, such as size of usable\nproperty for concessions, zoo philosophies regarding amenities, and cost allocations.\nBecause these complex factors could not be addressed, FONZ maintains that\nwe did not provide true apple-to-apple comparisons in the report. Consequently, FONZ\nbelieves that comparisons of net contributions with other zoos are invalid and that we\nshould not have made findings based on the comparisons.\n\nWhile we found the comparative analysis helpful, our findings are based on multiple\nsources, not solely on the peer averages. These other sources included, in part, FONZ\xe2\x80\x99s\nretail consultant, consultants hired by the Institution to review retail services as well as to\nassist in the development of the master plan, SBV retail experts, data from the Association\nof Zoos and Aquariums, tours and discussions with seven other large zoos, and our own\nobservations. And while our comparative analysis used the peer zoo average as a\nbenchmark, we calculated peer averages based on approximately eight to ten respondents\n(with only minor adjustments or exclusions), thereby attempting to mitigate differences\nin accounting structures to the extent practicable.\n\nFONZ was also concerned that our reliance on dated information means our report does\nnot reflect current conditions. We believe our report makes clear that at the time of our\nverification work, the most recent annual financial data available from peer zoos and\nFONZ was 2005. We included FONZ\xe2\x80\x99s 2006 financial data throughout the report to better\nreflect current conditions at the Zoo. We also believe our report presents a fair and\nbalanced assessment of actions taken by FONZ in the past year to improve operations as\nwell as the visitor experience.\n\nFONZ also included references to inaccuracies in our draft report. After considerable\ndiscussion and other communications, we either incorporated appropriate changes to the\nreport, or FONZ generally agreed that its comments were not applicable.\n\n\n\n\n 32\n\x0cAPPENDIX A. SCOPE AND METHODOLOGY\n\nOur audit primarily covered a three-year period, from 2003 through 2005, and we\nselectively reviewed additional information over a seven-year period, from 2000 through\n2006. We conducted our audit largely in the Washington, D.C. area from November 2005\nto July 2007 in accordance with Generally Accepted Government Auditing Standards. We\nalso visited seven zoos in several East Coast and Midwestern states.1\n\nInitially, we met with Zoo and FONZ officials to understand what financial data and\ndocuments were being prepared, how they were being utilized, and what other data were\navailable. To ensure that FONZ\xe2\x80\x99s data were reasonably accurate, usable, and compatible\nwith the Zoo\xe2\x80\x99s reporting needs, we analyzed FONZ\xe2\x80\x99s internal management reports and\nfinancial statements. Later, we met with FONZ\xe2\x80\x99s external auditors and different levels of\nmanagement to understand internal controls and their effect on the financial statements\nand how departmental procedures affected operations. We reviewed the external auditors\xe2\x80\x99\nworkpapers for fiscal years 2004 and 2005 and noted that unqualified opinions were given\nfor both years examined, as well as for 2006. We also obtained copies and reviewed\nactivities related to selected policies that controlled aspects of cash, food, and merchandise\noperations. At the mid-point of our audit, we briefed FONZ and the Zoo on our interim\nfindings. We also met later with the Institution\xe2\x80\x99s Office of Planning, Management, and\nBudget and a contractor the Institution had hired to provide data for an analysis of\nSmithsonian retail operations. Additionally, we reviewed other analyses and prepared\ndocuments, as well as numerous consultant studies and surveys.\n 2\nWe reviewed the prior OIG audit of the Zoo\xe2\x80\x99s parking operations. That report had\nidentified weaknesses concerning internal controls over the collections, deposits, and\nrecording of parking operations revenues. To its credit, management has implemented\nactions to correct these weaknesses.\n\nTo develop a framework for understanding FONZ\xe2\x80\x99s profitability and operating efficiency,\nwe obtained data from zoos and other comparable organizations for three fiscal years\n(2003 through 2005) to the extent available and performed trend analysis. We also\nexamined museum and zoo association data. To improve comparability of data, we\ndeveloped a survey to accumulate data from 32 U.S. zoos with the largest attendance\nlevels, FONZ, and SBV. We did not verify the accuracy of this data for purposes of our\nanalysis and we assumed that survey instructions were uniformly carried out by all\nparticipants. We acknowledge that there are numerous differences affecting the\ncomparability of survey data such as regional differences, usable zoo acreage, and\nmanagement philosophies, as well as differences in accounting methods and allocations.\nThe survey primarily focused on merchandise and food and beverage operations, but we\nalso obtained data on other areas such as parking, attendance, and membership. Of the 32\nzoos we surveyed, 18 provided us financial data and answered other operating questions.\n\n\n\n1\n We visited the Cleveland Metroparks Zoo, Columbus Zoo and Aquarium, Lincoln Park Zoo, Philadelphia\n2\n Zoo, Saint Louis Zoo, Toledo Zoo, and Zoo Atlanta.\n Parking Operations at the National Zoological Park, No. A-04-09 (December 27, 2004).\n A-1\n\x0cConcurrent with our efforts to collect data by survey, we visited seven zoos and met with\nfinancial, merchandise, and food managers; toured Zoo grounds for ideas and\ninformation on additional revenue-generating activities and to better understand how zoo\nconcession operations were managed; and gathered additional documents to help make\nour comparisons. For SBV, we spoke with the managers of concession operations and\nobtained financial statements. However, SBV did not complete our survey and provided\nonly limited concession information. We met with the Chief Financial Officer and Chief\nOperating Officer of SBV and reviewed the agreement between the Institution and FONZ\nto determine whether both parties were meeting their responsibilities as laid out in the\nagreement. We also toured the Zoo with SBV\xe2\x80\x99s then-President of Retail Operations to\nobtain his observations on store presentation as well as on merchandise pricing and\nselection.\n\nWe developed criteria consisting of peer survey averages based on various operational\ndata and financial ratios to compare and evaluate FONZ\xe2\x80\x99s revenue-generating activities.\nIn our analyses, we made allowances for differences in zoo and other entity-reported data\nto improve comparisons to FONZ to the extent practicable. For example, we excluded\nGeneral & Administrative expenses because of vast differences in incurred expenses and\naccounting treatment by survey respondents. Also, we obtained comparative third-party\nconcessionaires\xe2\x80\x99 data.\n\nTo determine the extent to which the Zoo\xe2\x80\x99s future plans included revenue-generating\noperations, we held numerous discussions with OFEO, Zoo, and FONZ officials on the\nZoo\xe2\x80\x99s ten-year master planning process. We also obtained and reviewed draft planning\ndocuments and related consultant studies.\n\nFinally, we noted that FONZ\xe2\x80\x99s internal reports were not always consistent or easy to use,\nand Zoo officials indicated that they were having difficulty comparing financial data from\none period to another. At the request of the Zoo\xe2\x80\x99s Director, we reviewed FONZ\xe2\x80\x99s internal\nmanagement reporting format. We also compared FONZ\xe2\x80\x99s reports to reports obtained\nfrom other zoos we visited. We discussed the various reports with FONZ and Zoo officials\nand provided examples to them for their consideration and use.\n\n\n\n\n A-2\n\x0cAPPENDIX B. FINANCIAL MEASURES\n\nThis appendix presents various financial measures for FONZ and comparisons to other\nzoos and Smithsonian Business Ventures. We define our terms and provide additional\nnotes at the end of the appendix.\n\nWe calculated the figures we present here for cost of sales, direct labor, and net\ncontribution as a percent of revenue.\n\nMerchandise Comparisons to the Peer Survey Average\n\n\n Chart 1: FONZ's Revenue\n (as a Percent of the Peer Survey Average Revenue)\n 250%\n\n 200% FONZ\xe2\x80\x99s revenue from\n merchandise operations well\n exceeded peer survey averages and\n 150%\n increased from 2003 to 2005. In\n 100% 2003, FONZ\xe2\x80\x99s revenue was\n approximately 70% higher than\n Peer the peer survey average and by\n 50% Survey\n Average\n 2005, FONZ\xe2\x80\x99s revenue had\n increased to 110% higher than the\n 0%\n average.\n 2003 2004 2005\n \xe2\x80\xa2Each year\xe2\x80\x99s peer survey average revenue is shown at\n 100% for comparative purposes.\n\n\n\n\n Chart2:2: Cost\n Chart Cost ofofGoods\n Goods Sold\n Sold\n (as(as a Percent ofofRevenue)\n a Percent Revenue)\n FONZ\xe2\x80\x99s cost of goods sold\n 50% (COGS) was higher than the peer\n 46.4%\n 44.5% survey average, which equated to\n 43.7% a lower net contribution than\n 40.7% 40.7% other zoos. This means that\n 40.1%\n FONZ may have paid too much\n 40%\n for the merchandise that it sells. A\n high COGS could also reflect a\n lower than average markup on the\n price charged to customers.\n 30% FONZ\xe2\x80\x99s 2005 COGS was about\n 2003 2004 2005\n 4 percentage points higher than\n the peer survey average.\n Peer Survey Average FONZ\n\n B-1\n\x0c Merchandise Comparisons\n\n Chart 3:\n Chart 3: Direct\n DirectLabor\n LaborExpense\n Expense\n (as(asaaPercent\n Percent ofof Revenue)\n Revenue)\n30%\n\n\n\n25% Direct labor expense showed a\n declining trend and almost closed\n 22.4% the gap with the peer survey\n20% 21.0% average.\n\n\n15%\n 2003 2004 2005\n Peer Survey Average FONZ\n\n\n\n\n Chart4:4:Net\n Chart Net Contribution\n Contribution\n (as a Percent of\n (as a Percent ofRevenue)\n Revenue)\n40%\n\n While FONZ\xe2\x80\x99s net contribution\n35%\n improved from 2003 to 2005, it\n was considerably lower than the\n30% peer survey average. FONZ\xe2\x80\x99s\n higher than average COGS (see\n25% Chart 2) and direct labor expense\n (see Chart 3) contributed to\n20% FONZ\xe2\x80\x99s lower than average net\n contribution.\n15%\n 2003 2004 2005\n Peer Survey Average FONZ\n\n\n\n\n B-2\n\x0c Merchandise Comparisons\n\n\n\n Chart\n Chart 5: 5:2005:\n 2005: Number\n Number of Cash Registers\n of Cash Registers\n per 100,000 Visitors\n Per 100,000 Visitors Perhaps related to its lower than\n 1.00 average square footage, FONZ\n also had a lower than average\n 0.80 number of cash registers per\n 100,000 visitors.\n 0.60\n \xe2\x80\xa2 2005 Peer Survey Average: 0.91\n \xe2\x80\xa2 2005 FONZ: 0.77\n 0.40\n We note that FONZ has recently\n 0.20 added a cash register to the Panda\n Gift Shop.\n\n 0.00\n Peer Survey Average FONZ\n\nHowever, despite its small square footage, FONZ\xe2\x80\x99s capture rate (total transactions divided\nby total visitors) was similar to other zoos.\n\n\xe2\x80\xa2 2005 Peer Survey Average: 12.6%\n\xe2\x80\xa2 2005 FONZ: 12.8%\n\nOne area that has not been hampered by FONZ\xe2\x80\x99s limited square footage is its online\nmerchandise sales (2005 online sales: $146,993). Based on our survey and zoo visits, most\nother zoos have not developed a strong online store presence.\n\n\n\n\n B-3\n\x0cFood and Beverage Comparisons to Peer Survey Averages\n\n\n Chart\n Chart 6:\n 6: FONZ's\n FONZ\xe2\x80\x99s Revenue\n Revenue\n (as\n (as aa Percent\n Percent of\n of the\n the Peer\n Peer Survey\n Survey Average\n Average Revenue)\n Revenue)\n 120%\n Peer\n Survey\n 100% FONZ\xe2\x80\x99s Food & Beverage revenue\n started out below the peer survey\n 80%\n average in 2003, but it increased\n 60% to 6% above the average in 2005.\n Food & Beverage brought in\n 40% slightly less revenue ($3.8 million)\n than merchandise ($4.2 million)\n 20%\n in 2005.\n 0%\n 2003 2004 2005\n \xe2\x80\xa2Each year\xe2\x80\x99s peer survey average revenue is shown at\n 100% for comparative purposes.\n\n\n\n\n Chart7:7:Cost\n Chart Cost ofofFood\n FoodSoldSold\n (as(as a Percent ofofRevenue)\n a Percent Revenue)\n 35%\n 30% FONZ\xe2\x80\x99s cost of food sold was\n consistently below the peer survey\n 25% average from 2003 through 2005,\n 20% signifying that FONZ paid less for\n its food than other zoos, helping\n 15% to increase net contribution.\n 10% Alternatively, a low cost of food\n sold could indicate that FONZ\n 5% charged customers a higher\n 0% markup than other zoos.\n 2003 2004 2005\n Peer Survey Average FONZ\n\n\n\n\n B-4\n\x0c Food and Beverage Comparisons\n\n\n Chart8:8:Direct\n Chart Direct Labor\n Labor Expense\n Expense\n (as(as\n a Percent\n a Percent ofofRevenue)\n Revenue)\n30%\n\n28%\n From 2003 to 2004, FONZ\xe2\x80\x99s\n26% 26.0% direct labor expenses were lower\n 25.5% than the peer survey average,\n24% positively affecting net\n contribution. In 2005, FONZ\xe2\x80\x99s\n22% expenses approximated the peer\n survey average.\n20%\n 2003 2004 2005\n Peer Survey Average FONZ\n\n\n\n\n Chart 9:\n Chart 9: Net\n NetContribution\n Contribution\n (as(as\n a Percent\n a Percent of of Revenue)\n Revenue)\n45%\n\n FONZ\xe2\x80\x99s net contribution was\n higher than the peer survey\n40% average because its cost of food\n sold (see Chart 7), and direct\n labor expenses (in 2003 and 2004)\n were lower than the average (see\n Chart 8).\n35%\n 2003 2004 2005\n Peer Survey Average FONZ\n\n\n\n\n B-5\n\x0c Food and Beverage Comparisons\n\n\n\n Chart 10: Capture Rate\n Chart 10: Capture Rate\n FONZ\xe2\x80\x99s Food & Beverage capture\n (Transactions per Visitor) rate (total transactions divided by\n45% total visitors) appeared low\n compared to four other zoos who\n40%\n provided data in our survey. This\n35% may be an indication of FONZ\xe2\x80\x99s\n limited service ability, such as\n30% FONZ\xe2\x80\x99s lower than average\n25% number of cash registers per\n visitor. In 2005, FONZ had 1.43\n20% cash registers per 100,000 visitors,\n while the peer survey average was\n15% 1.86 (a 30% difference). However,\n 2003 2004 2005 FONZ has recently increased the\n availability of food service cash\n Peer Survey Average Peer Survey Low Peer Survey High FONZ\n registers.\n\n\n\n\n B-6\n\x0cMerchandise Comparisons to Smithsonian Business Ventures (SBV)\n\n Chart\n Chart11:11:\n FONZ Merchandise\n FONZ Revenue\n Merchandise Revenue\n $8,000,000\n $6,000,000\n $4,000,000\n $2,000,000\n $0\n 2001 2002 2003 2004 2005\n\n\n Chart 12:SBV\n Chart 12: SBV Merchandise\n Merchandise Revenue\n Revenue\n $60,000,000\n $40,000,000\n $20,000,000\n $0\n 2001 2002 2003 2004 2005\n\n\nFONZ and SBV Comparisons and Trends:\n Chart 13:\n 13:Net\n NetContribution\n\xe2\x80\xa2 FONZ\xe2\x80\x99s merchandise revenue is Chart Contribution\n approximately 1/10 the amount of (as a Percentofof\n (as a Percent Revenue)\n Revenue)\n SBV\xe2\x80\x99s. 35%\n\n\xe2\x80\xa2 FONZ\xe2\x80\x99s revenue and net contribution\n in 2005, with the debut of Tai Shan, 25%\n was still not as high as it was in 2001,\n after the arrival of two new pandas\n and before the impact of the 9/11 15%\n terrorist and D.C. sniper attacks.\n\xe2\x80\xa2 SBV revenues have been increasing 5%\n since 2003 but increases in net 2001 2002 2003 2004 2005\n contribution were not realized for\n SBV FONZ\n another year.\n\xe2\x80\xa2 SBV\xe2\x80\x99s net contribution declined between 2001 and 2003, and showed recovery in 2004\n and 2005.\n\xe2\x80\xa2 Net contribution was higher for FONZ than for SBV from 2001 through 2005.\n However, by 2005, FONZ and SBV had similar net contribution percentages.\n\nNote: FONZ operates on a calendar-year basis while SBV operates on a fiscal-year basis (October 1 \xe2\x80\x93 September 30).\n\n\n\n B-7\n\x0c SBV Comparisons\n\n\n\n Chart 14: Cost of Goods Sold\n (as a Percent of Revenue)\n55%\n\n\n SBV\xe2\x80\x99s COGS for merchandise\n50% stores was consistently lower than\n FONZ\xe2\x80\x99s COGS. However,\n FONZ\xe2\x80\x99s COGS generally\n 44.5%\n decreased over the years and was\n45% only slightly higher than SBV\xe2\x80\x99s in\n 2005.\n 43.6%\n40%\n 2001 2002 2003 2004 2005\n\n SBV FONZ\n\n\n\n\n Chart 15: Direct Labor Expense\n (as a Percent of Revenue)\n30% This chart illustrates the effect\n changes in revenue have on our\n depiction of expenses. FONZ\xe2\x80\x99s\n25%\n direct labor expenses initially\n increased as revenues declined\n20% but have since tapered off as\n revenues rebounded.\n15%\n SBV has had a general decline in\n its direct labor costs, except for an\n10% increase experienced in 2005.\n 2001 2002 2003 2004 2005\n SBV FONZ\n\n\n\n\n B-8\n\x0c SBV Comparisons\n\n\n\n\n Chart 16: Inventory Turnover\n4.0\n3.5\n3.0 FONZ and SBV both improved\n their inventory turnover from\n2.5 2004 to 2006. While FONZ\xe2\x80\x99s 2005\n2.0 turnover was just below SBV, by\n1.5\n 2006 FONZ had reversed the\n trend and improved to well above\n1.0 SBV.\n0.5\n 2.8 2.5 2.9 2.7 3.0 3.5\n0.0\n 2004 2005 2006\n SBV FONZ\n\n\n\n\n Chart 17: Sales per Square Foot\n$1,400\n\n$1,200\n FONZ had higher sales per square\n$1,000 foot than SBV from 2001 through\n 2005.\n $800\n\n $600\n\n $400\n 2001 2002 2003 2004 2005\n SBV FONZ\n\n\n\n\n B-9\n\x0cKey to financial measures\n\n \xe2\x80\xa2 Revenue: total merchandise or food and beverage sales (less discounts)\n\n \xe2\x80\xa2 Expenses (3 categories)*:\n\n o Cost of Goods Sold (COGS) or Cost of Food Sold: cost of merchandise or\n food and beverage (including paper products) that was sold\n o Direct Labor Expense: salaries and benefits for management and staff\n o Other Direct Expenses: other expenses directly related to the operation,\n such as supplies, shipping, telephone, and the like.\n\n \xe2\x80\xa2 Net Contribution: Revenue less all Expenses listed above\n\n*Excludes General & Administrative expenses.\n\nNotes:\n\nSee Appendix A: Scope and Methodology for additional details regarding financial\nmeasures comparisons.\n\nWe did not verify the data provided for our analysis. We relied solely on the statements\nand data provided by respondents. We also made certain adjustments to the data to\nimprove comparability. We computed peer survey averages based on our survey of 32\nlarge zoos, with 18 respondents. The averages only include those zoos that operate their\nown concessions, approximately ten for merchandise and eight for food service.\n\nWhile we factored other direct expenses into the calculation for net contribution, we did\nnot fully analyze them because zoo expense structures and allocation methods vary\nconsiderably.\n\n\n\n\n B-10\n\x0cAPPENDIX C. MANAGEMENT RESPONSES\n\n\n\n\n C-1\n\x0cC-2\n\x0cC-3\n\x0cC-4\n\x0cC-5\n\x0cC-6\n\x0cC-7\n\x0cC-8\n\x0cC-9\n\x0cC-10\n\x0cC-11\n\x0cC-12\n\x0cC-13\n\x0cC-14\n\x0cC-15\n\x0cC-16\n\x0cAPPENDIX C. MANAGEMENT RESPONSES (CONTINUED)\n\n\n\n\n C-17\n\x0cC-18\n\x0cC-19\n\x0cC-20\n\x0cC-21\n\x0cC-22\n\x0cC-23\n\x0cC-24\n\x0cC-25\n\x0cAPPENDIX D. CONTRIBUTORS TO THE REPORT\n\nThe following individuals from the Smithsonian Office of the Inspector General contributed to\nthis report:\n\nStuart A. Metzger, Assistant Inspector General for Audits\nJoan T. Mockeridge, Supervisory Auditor\nDouglas Kodish, Senior Auditor\nMary Stevens, Auditor\n\n\n\n\n D-1\n\x0c"