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5 chapter one IntroductIon Under any circumstances, assessing the viability of opening a retail establishment or restaurant is a daunting task. As stated in the article, âHow Much Does it Cost to Start a Retail Business?â (Waters 2016), âNot only will a well-thought out business plan give you an idea of the viability of and funds needed for your business, it is also a requirement of lenders. You need to prove to the bank that your idea is a good one, that you have calculated all costs and risks, and that you are worth investing in.â In the article, â9 Unexpected Costs of Opening a Restaurant,â Crone (2015) writes: There are many reasons restaurants fail, but about 80% of those that fail go under âbecause they underestimate the capital it takes to start their operations,â says David Kincheloe, president of National Restaurant Consultants. Anahi Angelone owns Corner Social, a New York City restaurant, and is soon launching another eatery, Angel. âThis will be restaurant No. 5 that Iâm part of opening, and thereâs absolutely always unexpected expenses,â Angeline says. âAlways expect to spend a lot more than you thought you would.â The expectation of spending more than anticipated is magnified for prospective operators looking to enter the airport concession industry. ACRP Report 126: A Guidebook for Increasing Diverse and Small Business Participation in Airport Business Opportunities (Exstare Federal Services Group 2015), states that âSmall business enterprises are significantly challenged by the high cost of doing business in the airport environment,â pointing out that: The vast majority of airport concession and construction opportunities require concessionaires and contractors to obtain surety bonds and insurance. For example, one city currently requires food and beverage conces- sionaires to provide workersâ compensation, employerâs liability, commercial general liability, automobile liability, and property insurance at set minimum amounts. Performance bonds must also be obtained in an amount equal to 12 months of the MAG [minimum annual guaranteed rent], and before commencement of construction the concessionaires must also obtain a performance and payment bond in an amount equal to the cost of construction. This is just one example of the inherent cost challenges that opening and operating a retail shop or restaurant in the airport presents. ACRP Report 54: Resource Manual for Airport In-Terminal Con- cessions (LeighFisher 2011), points out that âBuilding out concessions on an airport, whether retail or food and beverage, is typically more costly than constructing similar units in shopping centers. Security requirements and logistics make on-airport construction more costly.â Build-out costs and other major expenses, such as minimum annual guaranteed rent (MAG), per- centage rent, and minimum refurbishment investment costs are typically the concessionaireâs focus when evaluating the cost of a particular concessions opportunity. As these costs are almost universally communicated by airports to potential operators during the solicitation process, they are not the focus of this report. The unique character of the airport environment, resulting from the security requirements and logistics mentioned previously, creates a host of business challenges and accompanying expenses that are often unknown to operators without prior airport concessions experience, and not specifi- cally communicated by airports. Examples include more expensive capital financing costs; higher labor costs, resulting from longer daily operating hours and unanticipated operating hours because of flight delays; higher delivery charges, resulting from airport processes and increased amounts of delivery trips because of small storage spaces and the high volume of business; extending utilities to construction spaces; demolition and base building responsibilities not clearly articulated in a request for proposal (RFP); and unanticipated recruiting/hiring costs resulting from employees not
6 meeting TSA requirements (or finding other jobs in the midst of the sometimes lengthy verification process). A wealth of resources is available to prospective restaurateurs and retailers opening shops in the general marketplace, providing both general tips and advice tailored to particular market and type of business; as well as cost analysis surveys that provide specific cost figures by geographic area. These resources, often developed by executives or entities with vast industry experience, can alert prospective owner operators to unexpected costs that can produce tremendous strain on a fledgling retail or restaurant operation. Prospective restaurant or retail operators assessing opportunities to bid on concessions locations at airports do not benefit from the same level of institutional knowledge or available information. Although the large and established airport concessions operators have the experience and scale to understand the landscape of airport business costs and/or quickly fill knowledge gaps, small opera- tors looking to break into the industry need ready access to industry knowledge and resources to begin to develop strategies to compete and win concessions spaces. As a result of this information gap, these smaller concessionaires can find themselves underprepared to evaluate an airport business proposition. Consequently, these operators may incur un expected costs that reduce financial viability. The airport is the only viable source of information regarding its unique concession operating cost considerations. Although an airport may be able to provide historical conces- sion construction costs, minimum build-out requirements, and concession rent requirements, these costs may not account for other airport-specific operating costs such as badging, parking, commissary charges, security surcharges, etc. SyntheSIS objectIve The objective of this synthesis is to improve communication from airports to retail and food and beverage operators regarding the total cost of doing business at airports. The information contained within the report is designed to provide airport property and business managers, and any company operating or considering a retail or food and beverage concession at airports, with practical knowl- edge, ideas, and recommendations to augment the methods in which cost data are transferred. Armed with more extensive knowledge of the full costs of operating in the airport environment, prospective concessionaires, particularly small businesses, will be able to better gauge the business opportunity being offered by airports, and ultimately submit more accurate and enhanced proposals. Owing to the specificity of the subject and lack of detailed information currently available, this particular synthesis is narrow in scope: â¢ To describe the types of costs (particularly airport-specific costs) contained in concession agreements; â¢ To outline costs that an airport provides to operators from the following categories, at minimum, such as: â Costs of doing business locally, â Other payments to airports excluding MAG and percentage rent under concession agreements, â Other airport published fees, and â Hidden/intangible costs (e.g., shared terminal janitorial expenses, airport specific/unusual employee-related costs: commuting costs, badging, training, etc.); â¢ To identify other categories and costs that should be provided by airports to operators; â¢ To provide case examples of effective communication of cost information to retail and food and beverage operators by airports; â¢ To report any identified gaps in information and further research possibilities; and â¢ To create appendices containing sample checklists, handbooks and other materials used to assist airports or tenants in structuring successful business relationships.
7 SyntheSIS Study ApproAch A four-step process was undertaken to address these objectives: 1. Airport executives from the ACRP topic panel for this synthesis study supplied information about how they communicate cost data to concessionaires in order to generate a baseline of data with which to create an online survey instrument and generate questions for case example interviews. 2. General media sources, airport industry journals and articles, including the TRID database, and airport-specific documentation were reviewed to compile the current information available on the topic. 3. An initial e-mail assessing interest in the study was sent to airports nationwide; six airports expressed an interest in participating. After additional recruitment efforts, 15 airports repre- senting all sized hubs were sent the online survey questionnaire; all 15 completed the survey. 4. Phone interviews with three airports and three concessionaires were conducted to document specific details on their current practices, what they believe may be unexpected or under- communicated airport business costs, as well as their thoughts and suggestions on how the communication of costs from airports and concessionaires could be improved. The airport case example subjects, described in chapter four, volunteered to participate during the online survey process, whereas the participating concessionaires were recruited from the consultantâs database of concession operators. Business development executives from each participating concessionaire were interviewed to provide a broader business analysis perspective, as they look holistically at the entire spectrum of cost analysis when pursuing a potential concessions opportunity. report Structure This chapter has outlined the background of this report, the study methodology, and potential ben- efits. Chapter two details the survey process, identifying participating airports and concessionaires and reporting key findings. Chapter three summarizes a literature review of the three categories of documentation reviewed for this report. Chapter four includes the information and feedback from the case example interviews of the three airports and three concessionaires. Chapter five discusses some additional cost considerations for airport managers and concession operators. Chapter six contains a discussion of conclusions and subjects of potential further research. Appendix A reproduces the survey questionnaire; the other appendices airport documents, resources, and tools: Appendix B: Sample Airport Documents, Tools, and Resources Checklist Appendix C: SFO Terminal 3 Retail Marketplace RFP Pre-Proposal Meeting Presentation (2016) Appendix D: DFW FY 2017 Schedule of Charges Appendix E: TPA Concessions Handbook Appendix F: DEN Sample Concessions Agreement Appendix G: Concessionaire Survey Questionnaire