DC Auditor Finds Financial Mismanagement in DGS Operation of Eastern Market

Eastern Market, South Hall

Eastern Market, South Hall

DC Auditor Finds Financial Mismanagement in DGS Operation of Eastern Market

Low Sales Volume Apparently Puts Inside Merchants In Bind – Raises Questions About Business Model Going Forward

by Larry Janezich

A required biennial audit of Eastern Market operations by the DC Auditor found substantial financial mismanagement and raised questions about the future of Eastern Market which will soon face competition from two area Whole Foods and a possible Rodman’s Discount Gourmet in the future Hine development.

The audit for the period October 1, 1010 to June 30, 2012, revealed that the double rents which South Hall Merchants are required to pay until they agree to new leases (the current leases expired in June and December of 2008) were not collected by the Department of General Services (DGS).  Since the expiration of the leases, the audit found, no South hall merchant has entered into a new lease agreement.  Merchants continue to operate under the double rent penalty, but DGS is not collecting double rents because, according to the report, DGS believes it unrealistic. Presumably, the actual amount owed the city by merchants is much higher, given the figures apply only to the audit period.  Negotiations to increase the rent and enter into new lease agreements have been unsuccessful.

The current South Hall Merchants, their monthly rent, and the amount which DGS has said is owed the city for the 21 months covered by the audit period between October 1, 1010 and June 30, 2012, is as follows:

1. Blue Iris Flowers                                                           $672.80           $14,128.50

2. Bowers Fancy Dairy Products                                $716.10           $15,038.10

3. Calomiris Fruits & Vegetables                                $1411.20         $29635.20

4. Canales Delicatessen                                                  $1310.40         $27,518.40

5. Canales Quality Meats                                               $724.50           $15,214.50

6. Capitol Hill Poultry & Park Produce                  $1413.30         $29,679.30

7. Eastern Market Grocery                                          $659.40           $13,847.40

8. Eastern Market Pottery                                           $806.00           $16,926.00

9. Fine Sweet Shop                                                          $1638.00         $34,398.00

10. Market Lunch                                                            $2883.30         $60,549.30

11. Market Poultry                                                          $850.50           $17,860.50

12. Southern Maryland Seafood                               $2306.40        $48,434.40

13. Union Meat                                                                  $2137.80         $44,893.80

14. National Capitol Bank ATM                                 $875.00           $18,375.00

The auditor, deferring to DGS’ judgment regarding the collectability of the outstanding rents, recommends only that merchants be assessed some $3,500 in unpaid late fees.  The audit also found a lack of complete records of events in North Hall during the audit period, as well as incomplete records for outside vending.

In a written response to the report, dated July 11, 2014, DGS Director Brian Hanlon addressed its recommendations, agreeing to execute “best efforts” to enter into new lease agreements after a market rent appraisal, but warned, “It is not clear that sales volume for Eastern Market South Hall merchants can support market rents.”  Hanlon also agreed to send collection letters to merchants by August 30 regarding payment of late fees – under threat of enforcement of collection of the double rent provision.  Hanlon noted regarding two other recommendations – a standard contract for rental of North Hall and monthly accounting provisions – that remedies have already been put into effect.

If Hanlon’s speculation about the low sales volume for South Hall merchants is borne out, it would not augur well for Eastern Market’s future unless​ radical changes​ are made to the composition of vendors and/or marketing​.

​Along those lines, in ​May of this year the South Hall merchants floated a plan to open 7th Street to parking on weekends to boost business, saying that current market policies were “strangling” them.  The move would have displaced 34 outside weekend vendors, ​who ​responded with opposition to the proposal. See CHC post from May 4, here:  http://bit.ly/RiV60I

Eastern Market Community Advisory Committee (EMCAC) board member Chuck Burger is spearheading an effort within EMCAC and the local business community to develop a marketing plan for Eastern Market.  It is unclear what the status of the plan is.

EMCAC met Wednesday night, but though the Auditor’s report had been released that day, the matter was not brought up, either in the Market Manager’s report, or by any member of the Committee.  EMCAC serves as an advisory board regarding market operations.  Legislation to restructure the Eastern Market governing board to provide decision making management authority proposed by Councilmember Tommy Wells last year, fell victim to opposition by Mayor Gray, and despite rumors to the contrary was not revived last January.

15 Comments

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15 responses to “DC Auditor Finds Financial Mismanagement in DGS Operation of Eastern Market

  1. Michael

    The lease rates displayed here are, without question, far below current market rates. This is especially true when compared with Union Market, which charges rates that are easily double what Eastern Market charges.

    As much as I love Eastern Market and the vendors working there, many of the vendors have not kept up with the times. The quality of products and service is far below that of destination markets in other cities (e.g. Pike Place in Seattle or the Ferry Terminal in San Francisco).

    If Eastern Market creates a marketing plan, then it should start by defining what kind of market it wants to be and what kind of market the neighborhood demands. It will only hurt itself if it looks to the type of market that it has been in the past.

  2. Corey H.

    If Hanlon is right that the current vendors may not be able to pay market rent, that’s an argument for replacing the vendors and not for taxpayers to continue subsidizing them.

    It’s also interesting to see Union Market thrive while Eastern Market stagnates. The entrenched subsidized vendors at EM paying below market rate rent have no reason to innovate or match the changing tastes and preferences of consumers. That is the reason I think it’s stagnating. Not 7th street being closed. Not the vendors taking their business. Not parking. Not a lack of marketing.

  3. Kathleen

    I agree with the general thrust of the remarks above. I want to add that after attending an EMCAC meeting the other night, I emerged deeply skeptical of the ability/desire of that group to oversee Eastern Market. That night I offered a new idea on vendor marketing and, while the Market manager was generally receptive, the chair of EMCAC cut me off and listed all of the reasons why it couldn’t be done. (None good.) The idea might not be worth pursuing, but it would be nice to see an open mind.

    I got the sense that this is clubbish group of insiders of dubious merit. Maybe I caught them on a bad night. They struck me more as boosters than engaged community representatives.

    If Eastern Market needs new life in terms of vendors, then, in my view, EMCAC could certainly stand a lot of new fresh blood as well.

  4. DavidS

    Eastern Market compares favorably with Pike’s Place, which is overrated and not particularly aimed at a residential community.

    I am also not impressed by Union Market which caters to wealthy restaurant culture.

    The city made a specific decision not to turn Eastern Market into a fast food foodhall but to preserve it as a historic neighborhood fresh food market.

    If you want Disneyland, go to Disneyland.

    • anon

      I’m good with that, but wish the vendors were more diverse and offered better range of products. EM is WAY too skewed towards meat/poultry/fish purveyors at the expense of much of anything else. Reading Terminal would be a greater aspiration than Pike, but both are superior to EM.

  5. Maggie

    Union Market is nothing like Eastern Market. It’s prepared food versus raw food. They serve two entirely different purposes. If Eastern Market becomes only prepared food, I’d be very disappointed. I don’t want to have to schlep down to the Maine Avenue Fish Market for fish. And I don’t even know where else to go for meat.

  6. I am certainly frustrated by the lack of if not the speed of innovation at the market some times, and it is frustrating and has not been explained why the report was not brought up Wednesday night.

    But I agree with Maggie and DavidS here that charging market rates, moving to business models that can support much higher rates is a simplistic reaction that has huge risks of pushing the market in to something that many in the community would be horrified by. None of us went to bat for the market after the fire so it could be a nice building with a Whole Foods.

    Larry – special call out to your headline writing which is on par with the treatment from the Biz Journal. I think your headline and email leave the impression that the Auditor raised questions about the future of the market and that it not true or accurate at all. You are raising questions and making a bigger connection about the findings from the report, but they are not contained in the report. In fact, the Market is more financially stable now than it has been for a long time in part because of the growth of the outside market, use of the North Hall and other revenue.

    You might want consider separating out the editorial aspects of your headline from the findings of the Auditor, or at least if you are going to cite “questions” as a consequence of the report you should report on them with citation as either coming from yourself or some other party who has to defend those theories / questions.

  7. Rick Otis

    Union Market is a form of discretionary entertainment and is not in any way comparable to Eastern Market – unless you think Eastern Market should become a festival hall.

    Eastern Market is supposed to be – and should remain – a food market. May people put a lot of effort into preventing it from becoming a festival hall marketplace like Faneuil Hall, Pike, Baltimore Inner Harbor, etc. Despite all that effort, it has become a tourist destination because of marketing efforts by the City and various business interests that stand to gain from the prices and associated rents paid by tourists.

    Tommy Wells’ efforts to create a “walkable city” out of a city that’s already walkable have only made matters worse. Closing 7th street and his other efforts around the Market have done nothing but make it more attractive to people who don’t live here and don’t shop for basic foods. Talk to the south hall vendors and Saturday farmer-vendors about what all those crowds of tourists purchase. They buy cupcakes, a single apple, ice cream cones, trinkets, and crafts.

    I have to avoid weekends to avoid being swamped by people slowing strolling along while they look at the historic building and take pictures of the cute vegetables. In addition to several quick walks to get a few items during the week, I stop in on weekends as part of doing errands that required a car to pick up larger items and a weekly grocery purchase. Without a place to park for a short period of time, I have to go somewhere else. Ever try walking home from the Market carrying a turkey, a watermelon, or several full bags of groceries? Try carrying home a Christmas tree. I’m sure I’m not the only one who has been forced into shopping elsewhere against my will. This focus on tourists and not regular food shopper is a death spiral for the market – unless, of course, you like living in a Disneyesque Williamsburg and think food only comes from restaurants or festival halls like Union Market.

    I don’t think anyone could actually calculate a ‘free market rent’ for the South Hall. There is no comparable space to use as a basis. The rents should cover maintenance and capital repair. As long as it’s a publicly owned building, I don’t have any problem with some of my DC taxes going to something that should be (but is no longer) the cultural and social town green for my walkable neighborhood.

    • Hill Feller

      Calculating a fair market rent is very simple. Put the space up for lease and charge what people are willing to pay for it. That is fair market rent.

      Well intentioned civic groups and bureaucracies are unfortunately not nearly as good at this as they think. But the process is a snap if you let it work.

      Fair warning: this process may not result in the outcome that you think is the right one or the best one for the community. But, then again, it’s not your money.

      • Hill Feller

        I should clarify it may not be what you think is best for the community. But, how does a single person know what is best for a community? The old distributed information problem: markets are the best way to aggregate and optimize the millions of tradeoffs the thousands of people in our neighborhood make every day. Count me skeptical of the experts and people who claim to speak on my behalf.

    • anon

      sounds like you need a granny cart. problem solved. you’re welcome

    • TheGrassIsAlwaysGreener

      I have never had any difficulty purchasing a Christmas tree at Eastern Market. Walk up, choose your tree, have it trimmed and tagged, walk home and get car, drive back and pick up tree at intersection of 7th & N. Carolina. All done in less time it takes to drive somewhere with dedicated parking (although in the interest of full disclosure I can now purchase fresher, higher quality trees for less at the Brent Elementary sale). Want to buy a watermelon or 25 pound turkey that you can get almost anywhere else for cheaper? Try a wagon or, worst case scenario, parking behind the market or nearby when the doors are opened in the morning, or even (gasp) paying to park behind the Post Office. Undoubtedly, you’ll be counted among the curmudgeons whining about traffic once the Hine development is completed and the parking garage is opened.

  8. Rick, I agree that we need to retain the character and mission of the market but I think the market is and can be different things on different days and serve a lot of audiences. Buy your christmas tree on a weekday or a weekday evening. Or have it delivered by Brent. But don’t get rid of 100s of vendors who use the outside because you need to pick up a tree. Especially when those vendors are part of the income stream that allows the market to be financially stable without market rents.

    Its a balance. We don’t want Disney World and we don’t live in yesterday or on an Island.

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  10. Hill Guy Who Remembers the CONTROL BOARD

    The merchants blame their low sales on Seventh Street being closed on the weekends, but I don’t think that’s the issue. To lapse into biz school lingo, the “Eastern Market brand” in its current iteration is primarily an “experience” for people who don’t live in this neighborhood. Those people spend money, but they spend it on things associated with the “experience,” like ready-to-eat food and overpriced crap from the outside vendors. They aren’t looking to pick up a pound of ground beef. They’ll do that tomorrow at the Giant in Suitland or Alexandria.

    The food vendors in the south hall have always depended on the folks in the neighborhood to pay slightly higher than supermarket prices in exchange for the convenience. I’ll bet more than 90 percent of them arrive on foot. Adding another 50 parking spaces isn’t going to make a difference. So I agree with the food vendors when they say that they can’t afford to pay higher rents.

    At that point you get into a philosophical and political debate over whether the District should let the food vendors get away with paying lower rents, or whether the District should insist on higher rents. I favor the status quo.

    If south hall rents increase significantly, the vendors we know and love will be priced out business and Eastern Market will become another Georgetown Park, full of soulless national chains whose only virtue is their willingness to pay astronomical rent. Like the poster above, I don’t think we fought for the Market to be rebuilt after the fire just so it could eventually house a Forever 21 shop.