Resource Manual for Airport In-Terminal Concessions (2011) / Chapter Skim
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8 Concession Contracting Approaches
8 Concession Contracting Approaches
Pages 121-136
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From page 121... ...
A "Hybrid" approach is also used at some airports, wherein two or more of the four major management approaches are used. This chapter will provide a description of concession management approaches, including a summary of the advantages and disadvantages of each, and a discussion of financial performance by management approach that covers the topics of sales per enplaned passenger, concession space in operation, sales per square foot, and net revenue per enplaned passenger 8.1 Description of Concession Management Approaches In determining the optimal management approach, the airport operator must consider a number of factors, including the following: • The number of terminals at the airport, their layout, and the configuration of concession space and support space • Passenger volumes and demographics • The size and capabilities of the airport operator's concessions staff • Private-sector interest in the potential concession opportunities • Projected sales and revenue under each management approach • The airport operator's goals and objectives • The airport operator's terminal development plans, and the timing of the development • The airport sponsor's need or desire to attract private capital • The relative difficulty in soliciting and contracting with concessionaires under the airport operator's policies and legal constraints • The local political climate 8.1.1 Direct Leasing Direct Leasing offers the airport operator the opportunity to plan the use of terminal concession spaces, identify individual spaces for leasing or bundle spaces into contract packages, and then select the best concessionaire to operate each space or package of spaces.
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From page 122... ...
Implementation of the Direct Leasing approach does bring certain challenges. This approach generally requires the airport operator to have a larger staff with more skills and experience than the other concession management approaches because airport staff, under a Direct Leasing approach, must solicit, award, and implement numerous concession agreements and manage a multiconcessionaire operation.
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From page 123... ...
Additionally, the Prime Concessionaire approach provides for more coordinated design submittals, and construction permitting and oversight are required for fewer concessionaires. Overall, this concession management approach places considerably less oversight demand on airport concession staff and construction-related staff than the other concession management approaches.
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From page 124... ...
Rather than relying on airport staff, the Developer is delegated most decision-making authority, with some agreed-upon approvals retained by airport management, such as approval of the overall concession plan and the final slate of tenants. Most airport operators that have selected the Third-Party Developer approach (such as the operators of Baltimore/Washington International Thurgood Marshall, Philadelphia International, and Pittsburgh International Airports)
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From page 125... ...
The Leasing Manager may receive a fixed fee for its services and/or a percentage of rentals collected from concessionaires, or some other method of payment may apply. For example, the Metropolitan Washington Airports Authority has historically required its Leasing Managers at Washington Reagan National and Washington Dulles International Airports to charge concessionaires the greater of a minimum annual guaranteed rent or a percentage of sales as a concession fee, with the Authority subsequently receiving percentage rents from the Leasing Manager based on the concession fees that the Leasing Manager collects.
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From page 126... ...
This decision is best made after careful analysis of the costs and benefits of each approach. Table 8-1 presents a high-level summary of the relative strengths of each approach 126 Resource Manual for Airport In-Terminal Concessions Competition Capital investment Airport administrative costs Financial return Direct Leasing High High High High Prime Concessionaire Medium High Low Medium Third-Party Developer High High Medium Medium Leasing Manager High n.a.
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From page 127... ...
• Does not compete with tenants; shares goal of airport operator in maximizing sales, service • Develops food courts and other common areas; makes investment in common areas, directories, etc. • Variety of shops, concepts, subtenants creates high degree of competition and choices for customers Disadvantages: • Considerable potential sales volumes are necessary for Third-Party Developers to participate • Requires longer term, typically 15 years, for Developer to earn satisfactory returns • Developer takes cut of concession sales, which may reduce airport operator's concession revenues below potential of other approaches LEASING MANAGER Advantages: • Similar to Third-Party Developer, brings professionals with experience in marketing, leasing, developing, and managing food and retail spaces; single point of contact for airport management • Scope may include coordination of design and construction activities • May (or may not)
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From page 128... ...
Financial performance was analyzed using data for the busiest 35 airports in the United States, mostly large hubs (and a few medium hubs) , regarding concession space, sales, and revenue data 128 Resource Manual for Airport In-Terminal Concessions DIRECT LEASING Advantages: • Direct relationship between airport operator and concessionaires • Variety of stores/concepts operated by different concessionaires creates distinct customer shopping choices and a high degree of competition • Airport operator controls overall scope of program Disadvantages: • Requires the most airport staff time and expertise due to variety of individual concession agreements to award and manage • Airport operator has responsibility for common-area build-outs • Design and construction activities by many different firms increases workload for airport operator • Greater risk of failure, as individual agreements must be self sufficient; greater exposure to traffic risks • If local businesses are targeted, training will be required; there may be operating risks associated with inexperienced concessionaires PRIME CONCESSIONS Advantages: • Only a few points of contact for coordination of design and construction activities, depending on number of primes • Primes typically handle common-area build out, such as food courts • Requires less airport staff time (compared with Direct Leasing)
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From page 129... ...
Six airports used the Third Party Developer/Leasing Manager management approach, 9 used the Direct Leasing approach, 8 used the Hybrid approach, and 11 used the Prime Concessionaire approach. Table 8-4 presents a summary of revenue received by the airport operator from food and beverage and retail sales, revenue per enplaned passenger, and effective percentage rent for the airports included in the analysis (i.e., airports that provided revenue data to Airport Revenue News)
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From page 130... ...
Enplaned passengers rank Sales per enplaned passenger Total sales (millions) Square feet per 1,000 enplaned passengers Average sales per square foot DEVELOPER/LEASING MANAGER Newark 17.7 12 $10.57 $ 187.1 8.3 $1,278 Philadelphia 15.8 19 $8.60 $ 136.3 7.3 $1,178 Boston 13.0 20 $10.19 $ 132.3 11.7 $868 Washington Dulles 11.9 21 $8.48 $ 100.5 13.0 $654 Baltimore 10.2 25 $8.41 $ 86.1 8.3 $1,007 Washington Reagan 9.0 29 $9.01 $ 80.8 7.1 $1,269 Total / Average 77.6 $9.32 $ 723.1 9.2 $1,008 DIRECT LEASING Dallas/Fort Worth 29.0 4 $8.39 $ 243.1 7.7 $1,090 Denver 25.7 5 $8.42 $ 216.0 6.1 $1,371 Las Vegas 22.1 7 $10.10 $ 223.1 5.9 $1,721 Phoenix 19.8 9 $8.57 $ 169.8 7.6 $1,123 San Francisco 18.5 10 $11.70 $ 216.8 8.2 $1,422 Detroit 17.5 13 $9.07 $ 158.6 7.4 $1,219 Minneapolis 17.0 16 $8.98 $ 152.3 9.2 $974 Portland 7.2 33 $10.44 $ 74.7 10.8 $971 Kansas City 5.5 39 $4.97 $ 27.5 11.1 $449 Total / Average 162.3 $9.14 $ 1,481.9 7.6 $1,196 HYBRID Chicago O'Hare 34.0 2 $8.58 $ 291.9 3.5 $2,453 New York - Kennedy 23.9 6 $11.84 $ 282.8 9.2 $1,286 Houston Bush Intercontinental 21.6 8 $4.73 $ 102.2 4.1 $1,152 Orlando 18.2 11 $9.29 $ 169.4 8.6 $1,082 Miami 17.0 15 $9.92 $ 169.0 9.3 $1,073 Seattle 16.1 18 $9.60 $ 154.4 7.1 $1,354 New York - LaGuardia 11.6 23 $8.79 $ 101.7 7.7 $1,140 Chicago Midway 8.2 31 $8.24 $ 67.8 5.2 $1,573 Total / Average 150.6 $8.89 $ 1,339.2 6.6 $1,355 PRIME CONCESSIONAIRE Atlanta 45.1 1 $7.55 $ 340.5 4.2 $1,812 Los Angeles 29.9 3 $8.93 $ 267.2 4.9 $1,817 Charlotte 17.4 14 $8.12 $ 141.0 4.6 $1,775 Fort Lauderdale 11.6 22 $6.77 $ 78.5 6.6 $1,020 Salt Lake City 10.4 24 $7.39 $ 76.8 5.8 $1,275 Tampa 9.1 26 $8.66 $ 79.2 10.3 $840 Houston Hobby 9.1 27 $3.04 $ 27.7 2.8 $1,067 San Diego 9.1 28 $8.02 $ 72.7 5.5 $1,470 St.
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From page 131... ...
The Prime Concessionaire approach had lower than average rates for total spending, food and beverage spending, and retail spending Concession Contracting Approaches 131 Concession management approach Enplaned passengers (millions) Enplaned passenger Ran k Total sales (m illions)
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From page 132... ...
At airports using the Developer/Leasing Manager approach, there is typically less convenience retail space, but more specialty retail space in operation, and the most overall retail space in service. At airports using the Prime Concessionaire approach, the lowest total concession space was allocated for food and beverage and specialty retail, and the highest was allocated for convenience retail.
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From page 133... ...
Airports where the Third-Party Developer/Leasing Manager approach is used performed slightly below airports where the Direct Leasing approach is used in sales per enplaned passenger in the food and beverage category, but performed better in the retail category. On the whole, airports where the Third-Party Developer/Leasing Manager approach is used performed only about 2% better in sales per enplaned passenger than airports where the Direct Leasing approach was used, or about $0.23 per enplaned passenger.
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From page 134... ...
Sales per square foot is not a measure of profitability for the airport enterprise, however, as airports with very limited concession space may have high sales per square foot and at the same time are likely to have low sales per enplaned passenger. Sales per enplaned passenger is the best measure of overall concession performance.
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From page 135... ...
Only the total retail average percentage rent is shown for the Prime Concessionaire approach as two airports did not break out their space and sales into specialty retail and convenience retail sub-categories. The average effective rent for all airports was 14.2%.
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From page 136... ...
The Direct Leasing and Developer/Leasing Manager approaches, each of which creates incentives to develop the most space and the highest sales, produce higher revenues, as shown in Table 8-12. Figure 8-1 presents a comparison of the average sales per enplaned passenger and average effective rent by concession management approach.
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