Gebr Heinemann’s contractual ‘red lines’

Gebr Heinemann senior management spoke candidly about the contract negotiations with airports and other ‘landlords’ over the past year – and crucially, its ‘red lines’ on discussions about future concessions. COO Raoul Spanger said: “Our airport negotiations were a marathon but 95% of our negotiations have been completed.” He acknowledged that “there is no winner because the airports are under pressure, airlines under pressure and retailers are under pressure. “Governmental support was very different in all the countries worldwide. Some governments offered long term support. For example, in Germany, we immediately got short-term working support up to the end of 2021 and later through 2022. In other countries the support was quarter by quarter and this means also the talks with the airports were quarter by quarter. “An important element was always to do our homework. If I talk to a landlord about a concession fee or a contract, I have to prove that we have done everything to bring down our costs at all levels. Once we did that, we spoke about guarantees to be avoided; concession fees; postponement of investments and prolongations of contracts. We have not had the time to talk about the longer future. And most of the contracts are valid anyway. This dialogue will certainly dominate the next one and a half, two years actually.

“Concession fees was the most difficult element because airports can argue ‘you have 80% less turnover but you also pay 80% less rent’ and this is true. “Nevertheless, if we have a big airport operation, let’s say €200 million in turnover, we are prepared and we have always been prepared for crisis. That means our flexibility on cost is 20% to 25% which was always sufficient for any crisis which we suffered. If it is more than 50% or up to 60% and 70%, as we had here, you cannot compensate with the same concession fee. It needs to have a completely different set-up. No operation is the right one if you are losing 60% turnover. Overall we have reached fair compromise and this is the best we could reach. At all airports we want to build back again and want to be partners as before.” But what is clear is that the future will look very different. Spanger said: “What is the red line for Heinemann in the future? Fixed guarantees should be avoided in all contracts. There should be no guarantees at all in major crisis situations like a pandemic, when turnover falls to the bottom. A period of crisis should be added to contract duration to safeguard investments [by the retailer]. So if you have just invested a huge amount of money, one or two years should be added automatically to the contract. “The concession fee should be based on the agreed business plan and should be stepped in tiers. That means you have a clear agreement: if you have only 70% of the business plan turnover, the concession fee is X percent lower, if it is only 40% Y% lower, if it’s even less, Z% lower.

Global Sales Development 2020

Tender wins and shop openings

Source: Gebr Heinemann Annual Business & Corporate Responsibility Report 2020

Supply contracts and concessions

Source: Gebr Heinemann Annual Business & Corporate Responsibility Report 2020

“On the other hand, in good times, we have seen traffic boosted too. So the tiering should also be positive for the airport. So, maybe you have five new airlines from Asia and the turnover jumps, then the tiered model moves in the airport’s favour. This is what we are discussing and proposing individually, but also in a wider sense, because we believe the industry standard has to adapt after this crisis.” Market competition will remain high, said the company, so risk-taking will still be a factor, whatever the model. Spanger said: “It’s a global market and we all fighting for it. We have defined for ourselves first of all a new red line, what we will not sign in the future, And we will discuss this in the future, with all our landlords and partners, one by one. “But in this case, we will also raise our voice because it is a global issue. The whole industry cannot go on and ignore it for the future. We see a responsibility for ourselves, but also for the whole market to raise our voice and try to change a few things, which should not happen in the future in contracts, which might be affected by another pandemic. “We just need to avoid the few dangerous points that will hurt our business. We have to defend our market and have this discussion on a high level.”