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Resource Manual for Airport In-Terminal Concessions (2011)

Chapter:Chapter 13 - Managing the Concession Program

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Suggested Citation:"Chapter 13 - Managing the Concession Program." National Academies of Sciences, Engineering, and Medicine. 2011. Resource Manual for Airport In-Terminal Concessions. Washington, DC: The National Academies Press. doi: 10.17226/13326.
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Suggested Citation:"Chapter 13 - Managing the Concession Program." National Academies of Sciences, Engineering, and Medicine. 2011. Resource Manual for Airport In-Terminal Concessions. Washington, DC: The National Academies Press. doi: 10.17226/13326.
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Suggested Citation:"Chapter 13 - Managing the Concession Program." National Academies of Sciences, Engineering, and Medicine. 2011. Resource Manual for Airport In-Terminal Concessions. Washington, DC: The National Academies Press. doi: 10.17226/13326.
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Suggested Citation:"Chapter 13 - Managing the Concession Program." National Academies of Sciences, Engineering, and Medicine. 2011. Resource Manual for Airport In-Terminal Concessions. Washington, DC: The National Academies Press. doi: 10.17226/13326.
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Suggested Citation:"Chapter 13 - Managing the Concession Program." National Academies of Sciences, Engineering, and Medicine. 2011. Resource Manual for Airport In-Terminal Concessions. Washington, DC: The National Academies Press. doi: 10.17226/13326.
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Suggested Citation:"Chapter 13 - Managing the Concession Program." National Academies of Sciences, Engineering, and Medicine. 2011. Resource Manual for Airport In-Terminal Concessions. Washington, DC: The National Academies Press. doi: 10.17226/13326.
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Suggested Citation:"Chapter 13 - Managing the Concession Program." National Academies of Sciences, Engineering, and Medicine. 2011. Resource Manual for Airport In-Terminal Concessions. Washington, DC: The National Academies Press. doi: 10.17226/13326.
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Suggested Citation:"Chapter 13 - Managing the Concession Program." National Academies of Sciences, Engineering, and Medicine. 2011. Resource Manual for Airport In-Terminal Concessions. Washington, DC: The National Academies Press. doi: 10.17226/13326.
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Suggested Citation:"Chapter 13 - Managing the Concession Program." National Academies of Sciences, Engineering, and Medicine. 2011. Resource Manual for Airport In-Terminal Concessions. Washington, DC: The National Academies Press. doi: 10.17226/13326.
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Suggested Citation:"Chapter 13 - Managing the Concession Program." National Academies of Sciences, Engineering, and Medicine. 2011. Resource Manual for Airport In-Terminal Concessions. Washington, DC: The National Academies Press. doi: 10.17226/13326.
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Suggested Citation:"Chapter 13 - Managing the Concession Program." National Academies of Sciences, Engineering, and Medicine. 2011. Resource Manual for Airport In-Terminal Concessions. Washington, DC: The National Academies Press. doi: 10.17226/13326.
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Suggested Citation:"Chapter 13 - Managing the Concession Program." National Academies of Sciences, Engineering, and Medicine. 2011. Resource Manual for Airport In-Terminal Concessions. Washington, DC: The National Academies Press. doi: 10.17226/13326.
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Suggested Citation:"Chapter 13 - Managing the Concession Program." National Academies of Sciences, Engineering, and Medicine. 2011. Resource Manual for Airport In-Terminal Concessions. Washington, DC: The National Academies Press. doi: 10.17226/13326.
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Suggested Citation:"Chapter 13 - Managing the Concession Program." National Academies of Sciences, Engineering, and Medicine. 2011. Resource Manual for Airport In-Terminal Concessions. Washington, DC: The National Academies Press. doi: 10.17226/13326.
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Suggested Citation:"Chapter 13 - Managing the Concession Program." National Academies of Sciences, Engineering, and Medicine. 2011. Resource Manual for Airport In-Terminal Concessions. Washington, DC: The National Academies Press. doi: 10.17226/13326.
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Suggested Citation:"Chapter 13 - Managing the Concession Program." National Academies of Sciences, Engineering, and Medicine. 2011. Resource Manual for Airport In-Terminal Concessions. Washington, DC: The National Academies Press. doi: 10.17226/13326.
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Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

200 This chapter presents a discussion of concession program management practices. The effec- tiveness of terminal concession program management depends on many factors such as the size of the concession management staff; their training, background, and capabilities; the level of sup- port of senior management; the clarity of the concession agreement(s); and the willingness and ability of the concessionaires to cooperate with the concession manager(s). This chapter discusses the following topics in concession program management: • Staffing requirements and qualifications • Lease management systems • Understanding the concession agreement • Importance of comprehensive concession agreement files • Interaction with concessionaires • Marketing the concession program • Organizing the concession staff • Performance monitoring • Reconcepting existing units • Transition planning • Airports with well-managed concession programs 13.1 Staffing Requirements and Qualifications The number and experience of concession management staff are the primary determinants of the effectiveness of concession management. Staff capabilities should also be factored into the air- port operator’s choice of the concession management approach (see Chapter 8). The number of full-time equivalent (FTE) staff devoted to concession program management is often quite small, which restricts flexibility in choice of management approach and can result in unmonitored or under-monitored concession activities. Airport survey results for this research showed that the number of concession staff, including clerical staff, averaged 7.2 FTEs at large hub airports, 3.4 FTEs at medium hub airports, and 2.0 FTEs at small hub airports. Third-Party Developers generally had considerably larger staffs managing projects—on average 12.4 FTEs—mostly at large hub airports. Airline staff managing concession programs averaged 6.0 FTEs, although the staff at one airline managed the concession program at more than one terminal. Average concession staff levels are shown in Figure 13-1. Concession staff should have a good understanding of the business operations that are the basis for the terminal concession program and strong interpersonal skills for dealing with con- cessionaire management on issues as they arise. These issues include contract interpretation and enforcement, construction activities, security issues, periodic facility inspections, and other rou- tine and special events. C H A P T E R 1 3 Managing the Concession Program

Managing the Concession Program 201 Although concession management skills can be, and often are, gradually acquired by inexperi- enced staff through on-the-job training, it is desirable for staff to have practical prior management experience in retail operations and/or concession management or property management at an airport, shopping mall, or other comparable venue. Individuals with prior retail management experience are often strong candidates for airport concession management positions. Concessionaires often confirm that the airport operators with the best concession manage- ment practices are typically those with staff who understand the concession agreement and the concessionaires’ business operations and needs and where there is a deep level of trust and open communication between the airport and the concessionaire’s representatives. 13.2 Lease Management Systems Lease management systems may be offered as pre-packaged software program modules avail- able for sale, or customized software can be developed by a third-party vendor. Lease manage- ment systems can assist concession managers by providing ready access to important concession agreement data such as contract expiration dates, insurance and bond requirements, rents and concession fees, leasehold sizes and locations, and dates that key events are to occur, e.g., rent adjustments, exercise of options to extend the contract term, and so forth. In some cases, corre- spondence and activity statistics (e.g., monthly sales data) can be input and maintained in the lease management system for easy access and reference. Lease management systems may also include modules or functions that can be used to gener- ate billings, provide notices to tenants, analyze data, and produce management reports. It is important that airport operators who install a lease management system recognize the need to assign, and ensure proper training of, a staff member with overall responsibility for the system. 13.3 Understanding the Concession Agreement Like all contract agreements, concession agreements set forth the obligations of the parties. Inherent in the airport concession management staff ’s duties is the ability to read, interpret, and enforce contract requirements. This is a critical component of successful concession program management. Source: LeighFisher using data from the airport surveys conducted for ACRP Project 01-11. Figure 13-1. Number of full-time equivalent professional and clerical staff dedicated to airport concession management and development.

An initial step in successful concession program management is to read and understand the concession agreements under which concessionaires operate. Uncertainties or questions regard- ing the interpretation of concession agreement provisions should be discussed with the author of the concession agreement and/or legal counsel for clarification of intent. While it is unlikely that all matters will be clearly addressed in the concession agreement, a good understanding of the provisions of the agreement and their intent helps reduce uncertainties and associated dis- putes. Lease summaries can minimize time spent researching common questions. Concessionaires should also know their obligations under the concession agreement. The air- port concession managers should meet with each of the concessionaire managers before the commencement of any new agreement and whenever new managers are assigned to discuss the provisions of the agreement so that both parties have a clear understanding of what is expected and required. Periodic, follow-up, one-on-one meetings are also recommended to discuss the effects of concession agreement requirements on business practices and results and to clarify any contractual uncertainties. If concession agreement provisions appear to be creating undue hard- ship on a concessionaire, concession management staff should bring this matter to the attention of senior management to consider whether the concession agreement should be amended or whether a future policy change is justified. 13.4 Importance of Comprehensive Concession Agreement Files It is essential for airport concession management staff to maintain complete and comprehen- sive files for each concessionaire. In cases where a concessionaire has more than one concession agreement, it is often best to keep a separate file for each agreement for ease of reference and to reduce correspondence search time. Correspondence and other documents affecting more than one of a concessionaire’s agreements should be duplicated in each separate concession agree- ment file or cross-referenced. Files should be clearly labeled and may be separated into different categories, such as the following: • Concession agreement, including concessionaire’s proposal and relevant board agenda items approving the award of the concession privileges and approving the concession agreement • Construction-related documents • Insurance certificates • Guaranty instruments (e.g., surety bonds and letters of credit) • Operating permits • General correspondence and memoranda Care should be taken to ensure the integrity and completeness of each tenant’s files, particu- larly agreements, amendments, board agenda items, and correspondence related to the conces- sion agreement. Files should be secured during nonbusiness hours, and responsibility for managing the files should be established. Documents that are deemed confidential should be clearly labeled as such and kept in a secured location separate from the concessionaire’s other files. Sign-out cards should be used to keep track of anyone who has removed individual files. Maintaining comprehensive concession agreement files is much easier than correcting erro- neous information or rebuilding files that have not been kept up to date. Once the integrity of the files is compromised, considerably more effort will be required to restore the files than would have been required to maintain them in good order in the first place. 13.4.1 Tickler Files Tickler files of important dates in the concession agreements are an important part of keep- ing comprehensive files and critical to the concession management function. Tickler files are 202 Resource Manual for Airport In-Terminal Concessions

Managing the Concession Program 203 used to keep track of concession agreement expiration dates, rent adjustment dates, dates that various reports or other submittals are due from the concessionaires, bond and insurance expi- ration dates, deadline dates for implementing term extensions, and other important dates affect- ing the concession agreements. Tickler files can help ensure that renewals are timely, that various contractually authorized or required functions are not overlooked, and that staff assignments can more easily be planned and distributed based on anticipated workload. 13.4.2 Concession Agreement Summaries In addition to tickler files, summaries of important agreements that cover the most frequently used information in the agreements (e.g., expiration dates, leased premises sizes and locations, rents, and other key data) should be prepared prior to the beginning of the term of each conces- sion agreement. The summary should be prepared by the staff member assigned to manage the concession agreement to acquaint the staff member with all of the terms and conditions con- tained in the agreement. It should be noted that lease management system software (see discus- sion above) can be effectively used to automate the tickler file and lease summary functions. 13.5 Interaction with Concessionaires Managing the concession program requires frequent interaction between the concession and the concessionaires. The relationship between the airport operator and the concessionaires should be viewed as a partnership in which each party stands to profit from working together. By understanding each other’s business needs and working together, both parties will have the best opportunity for a mutually rewarding relationship. Periodic meetings between the airport concession manager and the concession operators to dis- cuss performance and upcoming events that may affect concession operations, to pose and answer questions, and to address other topics of interest that arise are recommended. During periods when the concessionaire’s business is getting established and during periods when major changes are occurring, more frequent meetings should take place. Topics for discussion at the individual meetings should be established by the airport concession manager in agenda format in advance and circulated to the concessionaire for review and comment prior to the meeting. The conces- sion operator should have the opportunity to add relevant items and issues to the agenda. In addition, joint meetings with tenant managers of concessions and other businesses at the airport should be held monthly. These meetings serve to get the word out quickly and efficiently to airport tenants on matters of importance, such as security rules, construction plans and updates, airline schedule changes, new gate assignments, and the like. In addition, monthly meet- ings offer a valuable forum for sharing matters of interest for all attendees. However, if an issue specific to a particular concessionaire arises, it is best to discuss the issue in an individual meet- ing rather than in a group setting. Another valuable meeting is the semi-annual or annual performance review wherein financial results and sales and revenue forecasts for given time periods are presented, and the concession- aire is given an opportunity to present ideas, suggest operational changes, and discuss areas of concern. These meetings may be attended by the airport’s senior management, especially in the case of larger concession agreements such as Prime Concessionaires, Third-Party Developers, and Leasing Managers. Other methods of communication that may be used by the airport operator may include ten- ant directives, tenant advisories, written correspondence, email, telephone calls, and emergency meetings. Concession managers must make decisions on the best method of communication,

taking into account the nature of the topic and its time sensitivity. In any case, all matters com- municated to concessionaires and their reactions and responses should be clearly documented. All of the airport concession managers in our survey who perceived themselves to be effective in managing and improving the performance of their concession programs believed that regu- lar communications with concession tenants was a key contributor to their effectiveness. Monthly or bimonthly meetings with tenants were cited as a particularly effective forum for communicating information and discussing issues and concerns. Compliance with contractual terms and conditions, the reasonableness of contractual inter- pretations, the willingness to discuss and consider each other’s needs and positions, and fairness and flexibility in problem solving are some of the key elements in building and maintaining suc- cessful relationships. While the nature of the job of managing airport concessions can sometimes be adversarial, trust and cooperation can be developed by listening to concession tenants’ con- cerns and being advocates when they need assistance in resolving operational and other issues. Good tenant/management relationships are key to the success of the concession program. 13.6 Marketing the Concession Program Marketing may be the responsibility of the concessions manager, the concessionaire(s), or both. Consultation with concessionaires can ensure broader cooperation on marketing efforts and contribute to making good marketing decisions. Common marketing methods include brochures, concession directory boards, radio and television advertisements, web-based adver- tisements, special events, banners, dioramas, menu boards, signs, sidewalk sales, promotional give-aways, and mass mailings. Figure 13-2 shows an example of a concession brochure created for Hartsfield-Jackson Atlanta International Airport. The brochure presents an overview of the concessions by major category 204 Resource Manual for Airport In-Terminal Concessions Figure 13-2. Example of a concession brochure (Hartsfield-Jackson Atlanta International Airport).

Managing the Concession Program 205 and presents location maps by concourse showing the concession locations. The brochure is available for viewing on the airport website and can be viewed by persons online while in the air- port or can be downloaded as a portable document file (.pdf ). Airport websites serve a similar function, and can inform passengers of the available food, retail offerings, and services at an airport. Figure 13-3 shows an example of the concessions list- ing on the Dallas/Fort Worth International Airport website. Many large airports outside the United States offer online catalogues and the ability to order goods in advance. This opportunity provides outbound passenger with a means to minimize time spent picking up merchandise at multiple locations at the airport. It is particularly effective for bulk purchase of items such as cigarettes and alcohol, where the customer’s preference is established. 13.6.1 Branding the Concession Program Raising awareness of and the reputation of the airport concession program should be long- term goals. One approach to raising the profile of the concession program is to brand the pro- gram, which can strengthen its identity with customers and help raise overall sales. The Port of Portland brands the landside concession area at Portland International Airport as the “Oregon Market.” The developer of the concession programs uses its “AIRMALL” brand at Baltimore/ Washington International Thurgood Marshall, Boston Logan International, Cleveland Hopkins International, and Pittsburgh International Airports. The branding of retail programs at major airports outside the United States is common. At Amsterdam Airport Schiphol, a world leader in airport concessions, a distinctive yellow shop- ping bag is used for all purchases at its concessions. The bag features the airport’s See/Buy/Fly Figure 13-3. Example of concession information on an airport website (Dallas/Fort Worth International Airport).

logo, and is widely recognized by international travelers around the world (see Figure 13-4). At Incheon International Airport, the retail program is branded as Airstar and its duty free shops as Airstar Avenue. The operator of Hong Kong International Airport promotes its Skymart. Branding the shops indicates to passengers that the shopping at the airport is special and a cut above the usual shopping experience at airports. 13.6.2 Marketing Funds At many large and medium hub airports, the terms included in concession agreements may require concessionaires to pay into a marketing fund, which is used to market the airport’s con- cession program. Moneys in the marketing fund are used for promotions; advertising; collateral materials; and quality control programs, including passenger surveys and secret shopper pro- grams. The fees paid into the marketing fund by each concessionaire typically range from 0.25% to 0.50% of sales. These fees are collected with rents as a separate item and are typically main- tained in a fund whereby unused moneys at the end of each year are rolled over to the following year. Concession managers should keep strict records of how and when the moneys are used, and periodic accountings should be provided to the concessionaires of such uses and remaining fund balances. Establishing a marketing fund often affects the airport operator’s budgetary procedures. For example, in their bond enabling legislation, many airport operators have pledged that all oper- ating revenues will be deposited in a fund to cover operating and maintenance expenses, debt service, and other required deposits. Therefore, the amount in the marketing fund may techni- cally need to be reauthorized in the following year’s operating budget. 13.7 Organizing the Concession Staff The number of concession management staff may vary from as few as two individuals with responsibilities in addition to their responsibilities for the concession program at small hub air- ports to numerous individuals that deal only with concessions, but in separate units with different 206 Resource Manual for Airport In-Terminal Concessions Figure 13-4. Example of a distinctive shopping bag advertising the concession program (Amsterdam Airport Schiphol).

Managing the Concession Program 207 functional responsibilities. It is the job of the concessions department leader to determine the opti- mum organizational structure and assignment of available staff. Separation of duties by functional responsibility should be considered in those cases where the number of concession staff allows for specialization. When organized around functional areas of responsibility, a concession management department would include organizational units under the concession manager, as follows: • Contract development unit. Prepares solicitations and concession agreements, negotiates contract document terms and conditions, prepares board agenda items, and may negotiate and prepare concession agreement amendments. Concession staff in this unit should have strong writing skills, pay attention to detail, have the ability to understand and develop legally accurate contract provisions, have negotiation skills, and have the ability to clearly and accurately prepare and present information for consideration by senior management and policy makers. • Contract monitoring unit. Responsible for overall management and enforcement of conces- sion agreement terms and conditions. The staff in this unit are in frequent contact with the concessionaires’ local representatives, and should have strong personal interaction skills. Staff should have the ability to read and understand the terms and conditions of concession agree- ments and the ability to recommend enforcement actions when needed. The individuals in this unit function as day-to-day contacts for the concessionaires and should be prepared to advocate for the concessionaires as the need arises. • Contract administration unit. Responsible for recordkeeping and ensuring that documenta- tion required by the concession agreement (e.g., insurance certificates, surety bonds, and oper- ating permits) are in place. This unit typically has responsibility for maintaining the lease management database and for file management. Staff members in this unit should have strong administrative skills. 13.7.1 Reporting Relationships of Concession Managers According to the survey conducted for this research project, the individual with primary full- time responsibility for the concession program at large hub airports is most likely to report to the airport operator’s commercial director or an overall deputy director (67%). The next most likely reporting relationship at large hub airports is to the finance director or chief financial officer (CFO) (17%). At medium hub airports, the reporting relationship is equally likely to be to the airport oper- ator’s commercial director or deputy director (33% each). At small hub airports, which have smaller organizations, more than half of concession managers report directly to the airport direc- tor, chief executive officer (CEO), or chief operating officer (COO) (55%). The next most likely reporting relationship is to the finance director or CFO (45%). Figure 13-5 summarizes the reporting relationships identified by respondents to the survey. 13.8 Performance Monitoring Successful performance monitoring requires well-trained, experienced staff with a good understanding of the concession agreements and time allocated to monitoring duties. Although on-the-job training is typical, consideration should be given to developing a training program that can be used for those new to the airport operator’s contract monitoring unit and as a peri- odic refresher for other staff. In cases where more than one staff member is assigned to concession monitoring duties, the person in charge should develop a contract monitoring assignment list with a primary and

backup staff member listed for each concessionaire. Periodic rotation of staff assignments may be used as an effective cross-training tool. At a minimum, the concession manager’s duties include the following: • Understanding the underlying terms and conditions of the concession agreements to be monitored • Assessing risk to determine where monitoring time is best spent • Developing and documenting a monitoring plan • Interacting regularly with concessionaire managers • Developing an understanding of each category of concession operation • Conducting compliance reviews • Providing constructive feedback to concessionaire management, as needed • Responding to concessionaire questions and requests and advising concessionaires of upcom- ing events that may affect their business • Acting as an advocate for the concessionaire when needed • Following up on customer complaints • Reviewing and evaluating concessionaire performance • Briefing senior management on concessionaire activities • Taking corrective action to address noncompliance when necessary Quality control practices (discussed in Chapter 3) are an important part of concession per- formance monitoring. In monitoring concession agreements, mystery shoppers, customer com- ment cards, passenger intercept surveys, focus groups, performance metrics, and discussions with counterparts at peer airports are often used, as well as field visits to similar types of busi- nesses at other locations to compare operations. Figure 13-6 shows the frequency of use of major quality control practices by hub size. 208 Resource Manual for Airport In-Terminal Concessions 6% 6% 6% 17% 67% 17% 6% 11% 33% 33% 55% 45% 0% 10% 20% 30% 40% 50% 60% 70% Director of Properties or Real Estate Assistant Aviation Director CEO or COO VP Revenue Management VP Marketing & Development CFO/Finance Director/Deputy Director Commercial Director/Deputy Director Small Hub Medium Hub Large Hub Figure 13-5. Reporting relationship of person with primary responsibility for the airport concession program.

Managing the Concession Program 209 An overview of tools for measuring customer satisfaction, including sales monitoring, passenger surveys, comment cards, mystery shoppers, and focus groups is provided in Chapter 3. In addition to these quality control tools, survey participants cited other quality control practices, as listed below: • Customer complaint hotline (email and telephone) • Customer service awards for concession employees • Food health and safety program • Informal staff inspections • Monthly terminal walk-throughs • Periodic customer intercept surveys • Regular monitoring for street price and hours of operation compliance • Website comments 13.8.1 Physical Inspections As part of concession performance oversight, “walk-around management” is an effective performance-monitoring tool. Walk-around management may be an informal activity on an unscheduled (and frequent) basis in which the concessions are visited as a customer or as an observer to see how well the concessions appear to be operating, or walk-around management may involve more formal inspection visits. Thorough inspections of facilities should be conducted periodically by the concession man- ager accompanied by the concessionaire manager, who can explain operations, answer ques- tions, and provide access to all operational areas. These formal inspections may be prearranged, or they may occur with little or no advance notice so that the concessionaire does not have time to get prepared and the concession manager can see the operation “as is.” Inspection checklists should be developed in advance and filled out during the physical inspec- tions. Results should be reviewed with concessionaire management. The checklist should answer the following questions: • Is the concession clean? • Are prices prominently displayed for each item? 83% 61% 56% 72% 82% 18% 47% 71% 27% 55% 73% 73% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Formal staff inspection program Mystery shopping services Customer comment cards Passenger/customer surveys that include evaluation of current program Large Hubs Medium Hubs Small Hubs Figure 13-6. Quality control practices and frequency of use in managing the concession program.

• Are approved prices being charged? • Are product display areas well stocked? • Are any food or beverage products on the menu unavailable? • Is the product presentation consistent with the concessionaire’s normal standards? • Is the concessionaire selling food products beyond their expiration dates? • Is there any counter clutter? • Is the concessionaire complying with signage policies? • Are an adequate number of cashiers available? • Are concessionaire staff members complying with dress codes? • Is loud or inappropriate music being played? • Does the concessionaire’s staff appear to be providing good customer service? • Does everything appear to be in working order? Concession facilities should be visited at opening and closing times on a regular basis to deter- mine whether concessionaires are complying with approved hours of operation. This visit may be by the concession manager or by others, as arranged by the concession manager (e.g., mys- tery shoppers). Opening and closing times are established based primarily on outbound flight schedules to provide good customer service for departing passengers. Opening times are impor- tant from both a revenue and customer service standpoint. For example, it is important that morning coffee and breakfast items are available and that newsstands are open and stocked with newspapers and other periodicals in time for the early morning departure peak, which, at many airports, is the busiest time of the day. Likewise, it is important to maintain service standards until approved closing times. Closing activities should not be visible to patrons during operat- ing hours. The concession manager should coordinate with the concessionaire to discuss and determine the policy regarding whether full menus will be available until the approved closing time or whether a more limited menu can be offered as closing time approaches. 13.8.2 Enforcement Actions One of the most difficult concession management responsibilities is determining how and when to implement enforcement actions against a concessionaire who is not complying with the terms and conditions of the concession agreement. The ultimate enforcement of termination is rarely sought, especially for relatively minor, but continuing infractions. Even in the case of more egregious violations (e.g., late payments of rent, expired surety bonds, failure to complete con- struction on schedule), the time and expense of terminating a concession agreement makes such actions prohibitively time consuming, expensive, and impractical. If termination is sought, the airport operator may lose revenue resulting from store closures while replacement concession- aires are sought. In reality, public airport operators are subject to a high level of scrutiny and judicial skepticism when seeking to terminate the contract of a concessionaire. For these practical reasons, airport operators often include fines, sanctions, or liquidated dam- ages (penalty clauses) in concession agreements as a disincentive to committing the violations noted above. These penalty clauses provide for escalation of the amounts to be paid to the air- port operator for recurrence of the same violation, and do not preclude other rights and reme- dies addressed in the concession agreement, such as a declaration of default. Violations subject to penalty clauses may include, for example: • Failure to operate during established business hours • Failure to submit reports on time • Failure to comply with the approved pricing policy • Noncompliance with the airport operator’s trash disposal and recycling program • Maintenance and cleanliness deficiencies • Failure to comply with record retention requirements • A variety of other performance failures, which are often tailored to deficiencies experienced at individual airports 210 Resource Manual for Airport In-Terminal Concessions

Managing the Concession Program 211 Progressive actions are typically taken to address concession agreement compliance deficien- cies. These actions should be listed in the concession agreement or included in airport policy documents. Great care should be taken in determining and documenting the progressive actions to be taken to ensure that the ability to address more egregious deficiencies is not unduly lim- ited and that harsh action is not mandated for minor infractions. The nature of the violation, the date by which the violation must be corrected, and the enforcement action to be taken should all be provided to the concessionaire in writing. Consistency in application is also necessary to avoid claims of favoritism or unjust treatment of one concessionaire or tenant versus another. A sample series of progressive actions that may be taken to enforce performance standards is shown below: • First Notice—concessionaire receives notice of a violation. • Imposition of Penalty—an amount of money is assessed against the concessionaire because of a violation. The penalty may be imposed for the first violation or may only apply if the violation continues beyond a stated grace period or recurs. The amount of the penalty may escalate for subsequent similar violations or failure to cure within a stated grace period. • Declaration of Default—for certain violations (e.g., lapse of insurance coverage), default may be declared immediately. For less serious violations, notices should be given, or, possibly, penalties may be imposed first. • Notice of Termination for Default—failure to cure a default within a certain stated period results in a notice of termination. Airport policy and/or the concession agreement will dic- tate whether the concessionaire is to be given additional time to correct the default and avoid termination. Another sample set of steps in progressive enforcement of concession agreements is the following: • Identify the potential violation. • Read and review pertinent provision(s) of the concession agreement. • Confirm your understanding of the concession agreement provisions with the author of the document and/or legal counsel. • Notify the concession manager to correct the violation (may be verbal or written depending upon the nature [seriousness] of the violation and whether it is an initial incident) and a time period for correction. • Impose any fines or penalties in accordance with the concession agreement. • Document the notification and any imposition of fines or penalties in writing. • Follow up to determine whether corrections have been made within the cure period. • If the violation continues, fines or penalties may be imposed again, as provided for in the con- cession agreement. Depending on the seriousness and frequency of the violation, the conces- sion contractor may also be placed in default at this time (it is a judgment call on when to take this course of action) by written notice to the party identified in the Notices section of the con- cession agreement. A cure period should be stated in the default letter. • Follow up to determine if corrections have been made within the cure period. • If the violation still continues, send a termination letter to the concession contractor, in accor- dance with the Termination section and the Notices section of the concession agreement. Before taking enforcement actions against tenants, concession managers should ensure that the violation is documented by internal or external sources. Internal sources may prepare writ- ten documents, such as inspection reports, notes from visits to concession facilities, or memo- randa to file or letters to the concessionaire identifying the violation. External sources, which are often considered more credible if the concessionaire challenges the action, may prepare written documents, such as mystery shopper reports, customer complaints, and third-party inspection

reports (e.g., health department, alcoholic beverage commission, and fire department). This type of documentation can also be of great value to airport management as it decides whether or not to extend the term of a concession agreement, award a new concession agreement to an incumbent, or provide a reference for a concessionaire. Airport concession managers should be empowered to make First Notice and Imposition of Penalty progressive enforcement determination decisions and should have quick access to legal counsel and airport policy-makers, if assistance in making such decisions is needed. Great care should be taken to avoid implementing enforcement actions prematurely or incorrectly, as this can create embarrassment and make future enforcement actions more difficult. Potential default and termination actions should always be reviewed and approved by legal counsel and upper management before the concessionaire is notified. Finally, even small fines can have a desired effect, particularly if notice is given to both the local concessionaire manager and the concession operator’s corporate representative. Any fine that has a negative effect on the concessionaire’s net income will be noticed and should result in attention to fixing the problem. 13.8.3 Dealing with Underperforming Tenants Annual sales expectations should be established for each concessionaire based on pro forma sales estimates, sales at other locations, and the concession location. Underperforming tenants create one of the most difficult challenges for airport concession managers. In addition to poor revenue performance, the concessionaires may have substantial time remaining in their terms and may ask for rent relief or some other form of assistance to compensate for financial losses. Underperforming tenants may even take action against the airport operator, claiming that their losses resulted from actions of the airport operator, whether justified or not. There is a cause-and-effect relationship between failure to meet sales targets and operational problems. The concessionaire may attempt to cut expenses to compensate for low sales, which may reduce sales even further, thus creating a downward spiral. It is incumbent upon the airport concession manager to recognize concessionaire shortcomings and to try to work with underperforming tenants to improve their situation. Some strategies the concession manager may implement to this end are as follows: • Holding regular and frequent meetings and discussions with local concessionaire manage- ment to identify the causes of underperformance and potential solutions. • Bringing in outside expertise (e.g., a retail consultant) to identify ways that the underperforming tenant may be able to improve its results. • Communicating directly with corporate management and asking that their attention be focused on solving the problems at hand. • Requesting or requiring replacement of local concessionaire management. • Reviewing policies and procedures and the operating requirements placed on the concession- aire to determine whether any reasonable changes can be made to assist the underperforming tenant without compromising customer service. These changes could include, for example, adjustment of required hours of operation or price changes. • Reconcepting of the unit. • Negotiating a buyout. If such attempts are not successful, contract termination discussions may proceed or, subject to the terms and conditions of the concession agreement, termination for default may occur. Senior management should be included in the decision-making process before any termination actions are taken. 212 Resource Manual for Airport In-Terminal Concessions

Managing the Concession Program 213 13.9 Reconcepting Existing Units When concession units are underperforming, reconcepting by the incumbent concessionaire may be a viable strategy. Before any decision on a request to reconcept a unit is made, the airport concession manager should determine the following: • Will a buyout be required and, if so, how much will it cost? • What is the sales and revenue improvement that can reasonably be expected from the recon- cepted unit? • How long will the store be closed before the reconcepted store opens? • Is there an opportunity to install a temporary replacement concept during store closure to minimize revenue loss? • Is there sufficient length in the term of the concession agreement to cover the costs of reconcepting? • Will the new concept overlap with nearby concepts? • Does the new concept fit well with the overall concession plan? • Is the concept the problem, or is the concessionaire the problem? • Why might the new concept fare better than the previous concept? • How do we develop a successful opening strategy for the replacement concept? A documented business plan should be submitted by the concessionaire, along with pro forma sales and expense estimates for the remaining term of the concession agreement before any approval to reconcept is granted. If operational problems appear to have been a cause of under- performance, the concessionaire should be prepared to explain what operational improvements it plans to make. If the reconcepting request is based on an extension of the term of the concession agreement, considerable care should be taken in evaluating the request. Term extensions are extremely valu- able. Granting a term extension precludes the ability of the airport operator to use the space as it sees fit once the current agreement has expired. Airport staff should also consider if a term extension is rewarding poor performance and if it would be considered a precedent that other concessionaires will seek. If underperforming concessionaires are granted term extensions, why not grant concessionaires that perform term extensions as well? For these reasons, a reconcept- ing request predicated on a term extension should be considered carefully and only after careful and documented business analysis. The approval should take into account the effect of the deci- sion on other tenants and on the concession program overall, but most of all, it should be based on a clear benefit to the airport enterprise. 13.10 Transition Planning As contract expiration dates near, the airport concession manager should anticipate and plan for a smooth transition to the succeeding concessionaire. A sample agreement closeout check- list is the following: • Upon closure: – All inventory and personal property must be removed. – Space must be left in broom clean condition. – All employee badges must be returned. – All employee parking permits must be returned. – Concession name must be removed from all signs, directories and publications. – Space must be inspected and any items needing repair must be documented in list form. • Within a stipulated time period after closure: – Repairs must be completed.

– All final reports as required by the concession agreement must be filed. – All final payments as required by the concession agreement must be paid whereupon performance/payment guarantees (e.g., bonds, letters of credit) may be cancelled. – Any buyout of improvements owed to the concessionaire must be paid. – Performance bonds/letters of credit may be cancelled. Concession managers should work in concert with the existing and succeeding concession- aire(s) to the extent possible to plan the concession turnover. Cooperation on the part of the exit- ing concessionaire has been the norm at airports overall, as most concessionaires are concerned with their reputations and may have an interest in returning at a later date. Additionally, the air- port community is small and word travels quickly; it would not be in the concessionaire’s best interests to earn a reputation as an uncooperative exiting tenant when it will be competing for spaces at other airports. Fortunately, cooperation between the incoming and outgoing conces- sionaire is based on an expectation of reciprocity, as the roles will likely be reversed some day. In some cases, there may be value in continuing an incumbent concessionaire through a sub- contract arrangement while the new concessionaire designs and constructs improvements. This approach can help maintain service to passengers and provide income to the airport enterprise during the transition period. For an outgoing concessionaire, its management, and employees, the incentive to perform at the highest level may decline as the end of the concession agreement term nears. Although most concessionaires will use their best efforts to continue business as usual, there is the potential for employee turnover or indifference resulting from uncertainties regarding continued employ- ment. At one large hub airport transitioning from a Prime Concessionaire to a Third-Party Developer agreement, service deteriorated as outgoing local managers failed to maintain ade- quate control over their business, and employee morale plummeted. The airport operator had to accelerate the transition to maintain reasonable levels of service and avoid public criticism. Performance monitoring and enforcement activities should be increased during the waning months of a concession agreement to ensure that proper customer service is maintained and to identify problems before they become more serious. To address concession employee job uncertainty, some airport operators insert a “first con- sideration in hiring” clause in the succeeding concession agreement, whereby existing employ- ees are provided some degree of assurance that the contract turnover will not result in job loss. Possible policy options range from mandatory hiring of existing employees for a minimum pro- bationary period to less stringent actions, such as job fairs and arranging interviews for existing employees. With some planning by the airport operator, employee transition concerns can be minimized. In most cases, the incoming concessionaire will want to draw upon employees who already understand the airport operating environment, have passed security background checks, and are willing to make the commute to work at the airport. Establishing a clear transition plan with the incoming and outgoing concessionaires will min- imize problems for all concerned. A transition checklist, including concession agreement close- out actions (as shown above), should be developed by concessions management approximately 6 months prior to initiating the new concession agreement to ensure that the transition proceeds smoothly and customer service disruptions are minimized. 13.11 Airports with Well-Managed Concession Programs There is considerable value in networking with peers regarding airport concession programs to determine what has and has not worked well. Fortunately, airport operators tend to be coop- 214 Resource Manual for Airport In-Terminal Concessions

Managing the Concession Program 215 erative and participate in industry associations and conferences to share information and net- work with peers. Concession managers and their staffs can particularly benefit by visiting with their counter- parts at airports with concession programs that have a reputation within the industry for being well managed. Consultants and concessionaires that were surveyed for this research project cited the airports listed below as having particularly well-managed concession programs (Canadian airports listed at U.S. hub size equivalent): • Large Hubs – Dallas/Fort Worth International Airport – Las Vegas McCarran International Airport – Los Angeles International Airport – Minneapolis-St. Paul International Airport – Phoenix Sky Harbor International Airport – Salt Lake City International Airport – San Francisco International Airport – Tampa International Airport – Toronto Pearson International Airport – Vancouver International Airport • Medium Hubs – Austin Bergstrom International Airport – Calgary International Airport – John F. Kennedy International Airport–JetBlue Terminal – Montreal Trudeau International Airport – Nashville International Airport – Ottawa International Airport • Small Hub – Norfolk International Airport

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TRB's Airport Cooperative Research Program (ACRP) Report 54: Resource Manual for Airport In-Terminal Concessions provides guidance on the development and implementation of airport concession programs.

The report includes information on the airport concession process; concession goals; potential customers; developing a concession space plan and concession mix; the Airport Concessions Disadvantaged Business Enterprise (ACDBE) program; and concession procurement, contracting, and management practices.

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