Industry Concessions
Building resilience into the airport concessions business
Last month, The Moodie Davitt Report and the Airport Restaurant & Retail Association (ARRA) jointly hosted a key conference session at the Summit of the Americas in Palm Beach on the future of concessions at airports, as reported in our April eZine. In follow-up, ARRA Executive Director Andrew Weddig talks to Dermot Davitt about the challenges facing the sector even as passenger traffic returns.
Since its founding in late 2019, the Airport Restaurant & Retail Association (ARRA) has become a vital influence on behalf of US airport concessionaires in their engagement with lawmakers and airports. The association’s regular online calls and webinars help tease out the issues that matter to members, from the challenges of labour and debt to the role of minority players in the airport retail business. ARRA has also used the platforms of industry events to make its voice heard, most recently at the IAADFS-organised Summit of the Americas in Palm Beach, where it co-hosted a session on the future of concessions alongside The Moodie Davitt Report. [Click here for coverage of that session from our April eZine]. Explaining the extent of the continuing crisis at that event, ARRA Executive Director Andrew Weddig said: “ARRA has estimated that US airport concession sales, excluding duty free, dropped from around US$825 million in April 2019 to just US$40 million a year later. Since then we have seen recovery but it’s only recently that members have seen daily sales levels reach those of 2019, although traffic is back at 90% of previous figures. “We are not recovered. Air travel has come back to about 90% in the US but that is not the same thing as recovery. If we are down 10-20% that represents the margin in many concessionaires’ businesses. The sales loss is still tough and many companies are at best in break-even situations. That means finding our way out of debt is much harder. “After laying off so many staff we are also struggling to get our workers back, and we face higher wage rates in turn, which impacts on margins. And high inflation puts further pressure on us. So we are not yet in financial balance.” He added: “We can’t go back to normal. The pre-pandemic model has fractures and the pandemic exposed them. We need to adapt to a new normal and become more sustainable, more agile and more resilient.” In this interview, Weddig speaks to Dermot Davitt in more detail about the impacts of crisis, building resilience into the system and the wider role of ARRA.
“Margins for concessionaires are certainly being affected now with the cost pressures we are seeing”
ARRA Executive Director Andrew Weddig
The Moodie Davitt Report: What are the priorities for you in your tenure as ARRA Executive Director?
Andrew Weddig: Over the past two years we have done a good job of getting ourselves into the conversation with airports and with lawmakers. That was assisted in no small part through acceptance by the Airport Minority Advisory Council (AMAC) and Airports Council International (ACI). Alongside these and other partners such as IAADFS we were successful in getting concessions recognised as a pseudo-beneficiary – as it was not a direct beneficiary – of relief from government [through two programmes, CRRSA and ARPA -Ed]. Although funding has been paid to airports it was intended to replace some of the lost revenue at concessionaires. For us there were several angles. One was to get named in the legislation, another was to help members get the message through to airports, and a further element was working with the Federal Aviation Administration to get the right definitions in place and recognised. So that has all taken place and now we are pivoting back towards the question of creating a sustainable business model.
Labour, debt and ‘the wild card of inflation’ are among the biggest issues facing the concessions industry, says ARRA
What lessons can you take from that process and in a wider sense, does the industry have the voice it needs with lawmakers today?
It’s early days for ARRA, just over two years, but what we have is a seat at the table. Keeping that seat at the table is one of my main objectives going forward and we aim to do it in an effective way. We have good relationships on Capitol Hill, though of course that could change quickly come election time in November, and we have good relationships with other associations in this arena. ACI for example views us as a strategic and important partner of airports because we are all looking to improve the passenger experience. And at the end of the day, none of us accomplish anything without the passenger. We are all in it together.
How do you sum up today’s biggest challenges for members?
It’s the sustainability of the business. People have a hard time getting labour, although it’s not that easy to gauge the size of the problem as companies are making do with what they have. But just making do, when you are stretched, is what starts to affect sales, starts to affect productivity, starts to affect your supply chain. If you are -10% short of passengers and revenue, you’ve got to start shrinking hours and that is basically your margin. And we have inflation on top of that. So there are multiple challenges.
ARRA has built good relationships with lawmakers but lobbying work must continue, says Andrew Weddig
So one of your key messages, even as traffic comes back, is that recovery in the business remains a long way off.
Yes. Too many airports out there see that the passenger counts are back, and jump to the conclusion that we are in a back to normal situation. Except airports and airlines are not back to normal. US airlines have US$60 billion of debt to work through. And things are changing because of labour, cost pressures, fuel prices and so on. The airlines don’t have enough pilots so how will that shake out? Probably in scheduling or route changes to the smaller cities, and that affects how people are flying through the network. Margins for concessionaires are certainly being affected now with the cost pressures we are seeing. If you have a chicken franchise at an airport, you probably already have a high cost of goods, and now you see chicken prices rise +20% or +30%. That is going to work itself down and is one of the big challenges. But there are things that airports can do in terms of building resilience. It’s not necessarily about where prices should be, it’s about how often we can change prices [see panel]. If I’m in the food business I can apply to change my airport prices twice a year, but those costs have gone up sharply, and now I’m seeing an already thin margin shrink further. If traffic or revenue is only at 90% instead of 100%, that is further eroded, and that money is gone forever. Then if the airport ties me to the High Street, I can adjust every six months, but I’m still not competitive because the restaurants on the street have better capacity, have better ways to manage their revenue streams. They can grow their customer base, they can change their menu with flexibility, whereas airports have many more restrictions. And those restrictions are part of the things we can start to ease. Let us manage our businesses. There are problems of debt too. Many smaller companies are in JV partnerships with larger groups that had access to capital. It was an odd thing about this downturn, that it affected specific parts of the economy. The mid-sized companies struggled to find that money outside their partnerships. The bankers didn’t want to invest in restaurants so there was a reliance on the primes. Now how do these partnerships start to pay back debt as there is a lot of debt out there? We estimate around US$1.5-2 billion in new debt, plus anything that got deferred. Ours was a roughly a US$12 billion industry pre-pandemic, and although companies shed a lot of costs, the fixed costs were still in the realm of 20% to 30%.
Building resilience into the concessions system is the greatest task in planning for tomorrow, says ARRA
What are the factors that will decide whether we get to a financially sustainable future?
We are likely to be dealing with other pandemics in the future so the big question is how do we build in resilience to our industry? Right now there are two big issues we all face collectively: prices and capital. Capex at the airport is way out of line with capex on the street. By itself it’s not such an issue. But it’s when you take airport cost structures around capital and labour, the security, the insurance, the long hours, all of those things that were used in the past to justify the +10% and then street pricing is still being used on top. Pricing is constrained. Concessionaires have no interest in running their business into the ground by charging too much and losing customers. There are not many good options. The customer might recognise that they have to pay that bit more, or the programmes change and go backwards, as they cannot afford those we strive to have today, or they get more generic or less service-oriented. That’s a backward step. Nobody wants that but without structural change we are putting ourselves in that position.
Do enough airports understand that this is a situation they need to react to, or with the traveller coming back, are many saying it’s business as usual?
Some understand that this is a big issue. Other airports have a misperception about how profitable this industry is. Some airports look at an annual report and tell us, well you made this or that profit last year so what happened to that? Well it goes to build new stores, it’s spread worldwide in the case of the major players. Some smaller players also believe that is money at the airport just waiting to be picked up but it’s not an easy business. It’s a retail business and retail is a low-margin business. The other big message is that airports need to stop the RFPs unless they have to issue them right now. It’s not sustainable quite yet. Some of the members’ concerns are that these RFPs are out there right now and there are no changes to them yet compared to pre-pandemic. Yet we don’t know how traffic profiles will return and business traffic may never recovery to what it was. We will see more restraint in bidding. Companies don’t have the capex budgets they had as they try to recover. So airports can put out RFPs and talk about the number of responses they get, but there are many that are passing on those responses.
Darkness into light: The road to financial balance remains a precarious one, says Andrew Weddig
So what does recovery look like for airport concessions in the short, medium and long term?
Someone said recently that this will come about when we’re in financial balance and that’s about right. Financial balance where we can afford our bills and don’t need to run to the bank to sustain ourselves day by day. But it won’t be easy. There are some dynamics out there that are affecting what is happening. Some products are sold at high margins that cover up other costs elsewhere but those might not last. In food, bottled beverages have high margins and they pay for a lot of this. Enplanement growth of +5-6% a year can also cover up a lot of weakness elsewhere. After 9/11 we had that sharp sales drop and suddenly the concessions industry is in the red. We’re in low margin territory now, in a market that is sensitive to the number of passengers, and changes to the underlying economics of airlines could have a big impact.
ARRA urges airports to waive pricing policies
The Airport Restaurant & Retail Association (ARRA) this month urged airports to relax concessions pricing policies in the current period of high inflation. It said that this can help “avoid a second financial crisis” for airport restaurateurs and retailers. ARRA has recommended that airports: • Waive contract restrictions on the frequency of price changes • Waive contract approval requirements of price changes • Adopt adaptive pricing that permits individual concessionaires to respond as necessary to cost pressures and market conditions
ARRA noted that concessionaires’ financial health is threatened by the combination of cost inflation and restrictive pricing at airports. “Airport restaurateurs and retailers are now operating at breakeven cash flows at best. There is little slack for additional financial challenges. However, the rapidly increasing rate of inflation is just the additional financial challenge that threatens the industry’s recovery. Once again, concessionaires face a financial crisis directly related to COVID.” ARRA said that while all consumers and businesses must deal with inflation, the magnitude of cost inflation for restaurateurs and retailers has exceeded consumer price inflation. “Since March 2021, the Producer Price Index for food & alcohol wholesaling increased +10.2%; the index for merchant wholesalers of non-durable goods, +10.7%. Each of these is representative of the increases in costs of goods airport concessionaires (and all food service and retail businesses) are experiencing. Moreover, it is expected to continue: the U.S. Department of Agriculture forecasts key categories of food products to reach double-digit price increases through the remainder of 2022. And we haven’t even mentioned labour. “With cost of goods as a percentage of sales ranging from +25% to +45% or more, cost inflation of this magnitude seriously squeezes concessionaire profit margins: anywhere from 250 to 500 basis points of profitability – a significant financial blow to a recovering business.” The association highlighted the challenge of simply increasing prices to offset costs, with many airport concessions contracts including pricing restrictions.
“Pricing policies that tie prices to comparative street businesses are common. Also common – and actually more important during this time of rapid inflation – are contract restrictions on the frequency of price increases (irrespective of what is happening on the street), as well as airport-approval requirements. If ‘market basket’ pricing is restricted to once or twice a year, then any cost increases between permitted price changes shrinks profits and is lost forever to the concessionaire – a loss that many cannot absorb during this stage of financial recovery from the pandemic.” The solution, said ARRA, is to allow individual concessionaires to independently manage their own prices in a manner that best fits their revenue and cost conditions. “ARRA urges airports to waive price change restrictions on concessionaires. Concessionaires want to make sales so consumers will provide a natural check on pricing. More adaptable pricing will allow concessionaires to mitigate the financial impact of inflation as they work their way out of the financial impacts of the pandemic. Adaptive pricing is a natural remedy to a critical problem. ARRA encourages airports to adopt adaptive pricing to support their concession partners during these economically challenging times.”
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The Moodie Davitt eZine Issue 311 | 30 May 2022
The Moodie Davitt eZine is published 14 times per year by The Moodie Davitt Report (Moodie International Ltd). © All material is copyright and cannot be reproduced without the permission of the Publisher. To find out more visit www.moodiedavittreport.com and to subscribe, please e-mail kristyn@moodiedavittreport.com