Mar. 1—The Pappas feud with the city over a contract to run restaurants and bars at Hobby Airport has focused on two questions this week: Why did it take the city so long to award a contract, and why did the two finalists offer starkly different compensation packages to the city?
Chris Pappas, the CEO of Pappas Restaurants, and other company representatives appeared again at City Hall this week, questioning the process that led to the city to propose a contract for its competitor, Areas, which would take Pappas out of the airport for the first time in 20 years.
That result, not yet approved by City Council, came after an unusually protracted bidding process, including three years and three rounds of proposals, two of which the city canceled.
"Why are we here? We're questioning the process. Explain to me how three rounds of bidding, two cancellations, doesn't deserve some questions and some transparency," Christina Pappas, the restaurant company's marketing director, asked the council on Tuesday. "I want to see that. We should all want to see that."
Mayor Sylvester Turner has fiercely defended that competitive process. He also pointed out Tuesday that Pappas still has existing contracts in city-owned venues, including the George R. Brown Convention Center, the Hilton Americas-Houston, and Bush Intercontinental Airport.
"This is a competitive process, it's not an entitlement deal," Turner told CEO Chris Pappas. "You are not entitled to continue your hold if you don't compete and win. If you don't compete and win, Chris, you are not entitled to your seat."
Here's a breakdown of the issues feeding the debate at City Hall:
Process
The city advertises contracts by putting out a "request for proposals," alerting companies that a new contract will be available soon. Interested companies bid on the work, and an evaluation committee of city workers grades them. Some are invited to give oral presentations, and finalists sometimes are asked for best-and-final offers.
The unusual thing about this contract is that it has gone through that process three times now. The city first started seeking proposals in 2019, but canceled that round shortly after the onset of COVID-19. It put out a new request in December 2021, which it canceled in September 2022 "due to comparatively close scoring." It reopened the request in October on a more expedited timeline.
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The bidders have been asked for best-and-final offers four times over the last three years. Pappas officials say that fact, paired with changing expectations and communication gaps, is why the procurement process deserves more scrutiny.
The administration has sent council members the executive summary of the third round of the bidding process, which the Chronicle obtained. It shows Areas narrowly beating out the Pappas-led group, 4 Families of HOU, in both the initial and final grades of that most recent round. The final score: 85.6 to 85.2.
"It's too close to call, is one of the reasons we got for the second bid (cancellation)," Christina Pappas said. "Well if it's too close to call, it looks like that third round was pretty close to call, as well."
The summary shows Pappas prevailing when compensation to the city was not included, by an average score of 78.2 to 75.8, or 2.4 points. Areas, though, got a 9.8 score on compensation compared to 7 for Pappas. That gave Areas the edge in total score by four-tenths of a point.
Areas is partnering with several local partners on the deal, including Helen Giddings, a longtime Dallas concessionaire who served with Turner in the Texas House; and Michael Harris, a former Houston police sergeant and attorney who worked with Councilmember Ed Pollard.
The summary also noted that Areas used "noted Houston chef" Chris Shepherd, the James Beard Award-winning chef behind the Georgia James steakhouse, as its culinary consultant, which it called a strength. A spokesperson for Shepherd said that was not true: Shepherd had preliminary talks with the company, but nothing materialized and he never worked with them.
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One outstanding question is how the companies ranked in the earlier rounds. Competitors have speculated that Areas did not perform as well then, before jumping into first to get the contract.
The administration has started giving council members more detailed presentations on the process and results, but it has not released the numbers publicly. At Large Councilmember Mike Knox said Tuesday that he was not allowed to take pictures or even notes during the staff presentation about the numbers.
"Let's show the scoring sheets and let's look at them," Christina Pappas said.
Rent fee
Airport concession operators pay the city based on a percentage of their gross sales. Most bidders on this contract offered around 15 to 17 percent, according to Mayor Pro Tem Dave Martin.
Areas has proposed what Martin described as a "very aggressive" offer: 22 percent of its sales, and it projected bringing in $470 million over the 10-year contract. The result would be $104 million for the city.
The Pappas-led group proposed giving the city 15.5 percent of its sales, which is more in line with industry standards. It projected $460 million in sales, which would bring $71 million to the city.
Pappas has suggested Areas would not be able to match its sales numbers, due to a transition period and lower average sales for the concepts they are offering. And others in the industry say the 22-percent offer would run the Areas margin to turn a profit incredibly thin.
That has fueled speculation Areas may be offering higher compensation to the city up front to score points in the bidding process, but then may come back and negotiate a lower percentage later, after it has won the contract.
"I want to make sure your commitment to abide by that 22 percent is strong and will not waiver," Martin told Areas CEO Carlos Bernal on Tuesday. "Because everyone I've talked to said that is an unbelievably aggressive bid, and some of them even said they're really not going to make a lot of money on it. But I doubt that, I think you're a smart business person and know what you're doing."
Bernal replied: "I'll go on record and say yes. We're not going to come back to (The Houston Airport System) and say, 'Oh we're just kidding, we didn't really mean that number.' We have never gone back to renegotiate a deal, and we don't have any intention to."
Later, Martin argued the difference in compensation was compelling. Even if Areas is unable to match Pappas' sales, its outsized fee to the city still would bring more revenue to the airport system, he said.
During the procurement process, the city hired a consultant to standardize revenue projections. The city came up with a uniform number to compare proposals: Roughly $370 million over 10 years, or $37 million per year.
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If Areas matched that more conservative number, it would give the city $8.1 million per year. If Pappas did better, selling $46 million per year, its 15.5 percent fee would give the city $7.1 million per year.
If they use the same $370 million revenue number, the difference in compensation to the city would be $25 million over the ten-year contract, Martin said. Add in two five-year options, and it's $50 million. That money only can be used on the airport system.
"So, the citizens of Houston, I'm going to ask you," Martin said. "Do you want me to ignore $50 million to the city of Houston, looking at our balance sheet, and flip this bid over to 4 Families?"
Chris Pappas said the bidding process does not merely go to the highest bidder, and the Pappas-led group should prevail on other factors. The bid summary showed Pappas did win the other categories, but not by enough to overcome the difference in compensation in the final round.
Another point for supporters of the Areas deal: When the city asked for best-and-final offers, Areas upped its offer, but Pappas did not.
The compensation debate is eerily similar to the one that played out when Pappas first won the contract, in 2002. Then, Pappas beat out a competitor, CA One Service, in a ranking based on design, concept, management and experience. When the city added compensation in, CA One Services came out on top.
Pappas was able to convince enough council members to get the contract over then-Mayor Lee Brown's objections in 2002. The company is hoping it can do so again 20 years later.
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