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54 Resource Manual for Airport In-Terminal Concessions 14.0 Concession space per 1,000 enplaned passengers 12.0 10.0 8.0 6.0 4.0 2.0 - $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 $9.00 $10.00 $11.00 $12.00 Passenger spend rate - food and beverage and retail (excluding duty free) Source: LeighFisher. Data from Airport Revenue News Fact Book 2009 (Airport Revenue News 2009). Figure 5-2. Relationship between concession space and sales—2008. 5.1.2 The Customers Passengers are the core customers for concessions. Within the passenger category of cus- tomers, however, there are subdivisions with very different characteristics—originating, termi- nating, connecting, international, and domestic. As described in Chapter 4, passenger spends vary by passenger characteristics, including the following: • Passenger residence and nationality. Nonresidents typically spend more at an airport than residents. As nonresidents include tourists, these travelers are more likely to purchase local souvenirs and gifts, generating greater sales volumes for the retail program. Certain national- ities also spend more than others. • Originating passengers. Originating passengers typically spend more time in the terminal than connecting or terminating passengers and tend to spend more. • Dwell time. International passengers typically spend more time in the terminal than domes- tic passengers and spend more money on both food and retail. • Trip length. Long-haul passengers typically travel in a relaxed and leisurely vacation mode. They tend to be away from home longer and therefore are more likely to make purchases for family and friends. Long-haul travelers usually spend considerable time in the terminal, cre- ating enhanced opportunities to frequent retail shops and restaurants. • Leisure travelers. Leisure travelers, compared to business travelers, prefer to arrive earlier at the airport; these passengers often represent the largest category of souvenir and gift buyers at the airport. They are more price sensitive and value oriented than business travelers. • Business travelers. Business travelers tend to spend less time at airports and less time shop- ping. They are good customers for convenience retail (newspapers, magazines) and for food and beverage services, including alcoholic beverages and higher-quality restaurants. Business passengers, often traveling on expense accounts, are less price sensitive and more service ori- ented than leisure travelers. Business passengers may also be good customers for so-called “guilt gifts” for spouses and children. • Frequent flyers. Generally, the more frequently passengers travel, the less time they are likely to spend in the terminal building, and their propensity to spend is lower.

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Developing the Concession Space Plan 55 • LCC passengers. Passengers on LCCs often spend as much or more than passengers on legacy airlines. Airport surveys indicate that LCC passengers do not necessarily spend less than legacy airline passengers in duty free and specialty retail units and are likely to spend more on food and beverages. • Spend per enplaned passenger. Of the airport operators surveyed, 81% reported that they use the spend per enplaned passenger metric for planning and for evaluating concession perfor- mance (100% of concessionaires indicated this as well). 5.1.3 Passenger and Other Customer Group Spend Rates Figure 5-3 summarizes the average food and retail passenger spend rates by hub size at 93 air- ports for which data are provided to Airport Revenue News. For both food and retail, there is a pattern of increased spending with increased airport size. The factors behind this pattern include more supportable offerings as traffic grows (more choices in food and retail) and increased numbers of long-haul travelers in the mix at larger airports. There are large variations in spend per enplaned passenger from airport to airport, even within each hub category. Table 5-1 summarizes the average spend and the 95th percentile upper limit (two standard deviations) by concession category and airport size. Airports that generate sales above two standard deviations from the mean are likely to have exceptional characteristics that make for an unreasonable comparison. For example, in 2008, Pittsburgh International Airport produced the nation’s highest specialty retail spend rate of $6.49, twice that of the next highest performing airport, due to a combination of factors that included terminal configuration, con- centrated passenger flows, and the expertise and contracting flexibility of a third-party devel- oper. In categories other than specialty retail, however, the airport’s performance was within two standard deviations and would be reasonable for comparison. $10 Food $9 Retail Total $8 Spend Per Enplaned Passenger $7 $6 $5 $4 $3 $2 $1 $0 Large Hub Medium Hub Small Hub Non Hub Airport Category Source: LeighFisher. Data from Airport Revenue News Fact Book 2009 (Airport Revenue News 2009). Figure 5-3. Average food and retail concession spending per enplaned passenger by airport category—2008.

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56 Resource Manual for Airport In-Terminal Concessions Table 5-1. Average and upper 95th percentile range of concession spending per enplaned passenger by airport size category—2008. Small Hub Medium Hub Large Hub Category Average 95% Average 95% Average 95% Food and beverage $3.49 $5.37 $4.50 $5.97 $5.34 $7.39 Convenience retail $2.17 $3.65 $1.95 $3.24 $1.88 $3.06 Specialty retail $0.27 $1.03 $1.21 $3.87 $1.71 $4.20 Total retail $2.42 $3.90 $3.15 $7.11 $3.53 $6.20 Total food and beverage and retail $5.92 $8.46 $7.66 $11.29 $8.87 $12.79 Duty free $0.00 $0.00 $4.98 $16.66 $7.05 $16.29 Note: At the 95% percentile passenger spend rates are independent. Performance in each category is independent of performance in other categories. Source: LeighFisher. Data from Airport Revenue News Fact Book 2009 (Airport Revenue News 2009). As Table 5-1 shows, the variation in spending per enplaned passenger within each airport size category is smallest (as a percentage) for food. Specialty retail shows high variations from airport to airport, which is to be expected as some older terminals have very limited airside retail pro- grams, and the terminal configurations preclude easy expansion. In addition to passengers, there are other customer groups at the airport, including those who accompany passengers to the airport or meet them there and airport and airline employees. Each of these customer groups has access to different parts of the terminal and has different spending characteristics. Well-wishers and meeters/greeters accompany travelers to the airport to see them off or arrive to pick them up. More specifically, well-wishers are nonpassengers accompanying departing pas- sengers into the terminal. Meeters and greeters are nonpassengers meeting and greeting arriv- ing passengers and accompanying them in the terminal. The numbers of well-wishers and meeters/greeters vary widely from airport to airport. Typically, the ratio of well-wishers and meeters/greeters to passengers has declined over time, as flying has become more commonplace. Currently, these ratios are often in the range of 0.2:1 but can vary widely. There can be large vari- ations from airport to airport in the ratio of well-wishers accompanying passengers to airports and meeters and greeters visiting the airport to meet an arriving passenger. International termi- nals typically have higher meeter/greeter and well-wisher ratios than domestic terminals. Airport, airline, and other terminal employees use the concessions. Each airline operating from the terminal has its own set of employees, including check-in and ticket agents and cabin and cockpit crews. In addition, ground-handling, Immigration and Customs, and security staff are key components of the terminal’s employees. These airline and airport employees represent a significant potential target market for airport retailers, particularly for the outlets that are eas- ily accessible pre-security. Airports with street pricing or employee discounts and branded food court units generate higher employee spend rates. Estimating average spend per employee can be difficult. Often the numbers of daily average airline/airport employees in the terminal are not well known. Nonetheless, estimating this number is better than ignoring it. Employees can account for a significant percentage of food court sales at many airports. Although spend per enplaned passenger is used as the yardstick, this unit number obviously varies by the type of customer, with arriving passengers, well-wishers, meeters and greeters, and employees typically spending far less than enplaning passengers. Customer surveys at a number of airports have indicated that the spending of enplaning passengers exceeds that of all other types of terminal users by a wide margin. Table 5-2 illustrates the typical spending of these groups as a

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60 Resource Manual for Airport In-Terminal Concessions Table 5-3. Recommended range of productivity for planning (sales per square foot). Range of Sales per Square Foot Concession Category Non Hub Small Hub Medium Hub Large Hub Restaurants/food courts (incl. seating) $100 – $200 $400 – $700 $800 – $1,300 $1,250 – $2,000 Retail $300 – $600 $650 – $1,200 $1,000 – $1,600 $1,300 – $2,000 Duty free $500 – $1,700 $2,200 – $3,600 Source: LeighFisher. The increase in productivity with airport size is not a factor that has been well discussed in the industry. Using a productivity factor appropriate for a small hub airport at a large hub airport would not account for the high labor and operating costs and higher investment requirements at large hub airports. Conversely, use of high productivity numbers appropriate for large hub airports at smaller airports can result in programs that may be undersized, inefficient, and less productive. Table 5-3 presents a summary of the range of productivity numbers recommended for use in planning. The high end of the ranges should be used if the terminal is space constrained. In some cases, a terminal may be incapable of providing the optimal amount of concession space indi- cated by the supportable space analysis. The lower end of the ranges is recommended for new terminals where flexibility is desired. In selecting a productivity number for planning at smaller airports, some flexibility is required. For example, a calculation of forecast sales per square foot for a specialty operation at a small hub airport when combined with a typical productivity number may yield a shop that is unrea- sonably small. The planner needs to consider either eliminating the shop entirely and including a retail merchandising unit (cart) instead, or using a lower, yet still reasonable, productivity number to arrive at a shop footprint that makes sense. One element that may cause confusion is that the productivity number used for planning may be lower than the current productivity at the airport. High sales per square foot do not, in them- selves, indicate a successful concession program. As sales per square foot increase to a level well beyond recommended levels, spend rates per enplaned passenger and total concession sales will be lower than they could be with sufficient space as sales may be lost during peak or busy peri- ods. Figure 5-7 illustrates this point conceptually. Table 5-4 shows the five large hub airports with the highest sales per square foot among the 25 large hub airports for which data were submitted for the Airport Revenue News Fact Book 2009 (Airport Revenue News 2009). The airport with the highest sales per square foot, Chicago O’Hare International Airport, ranked 16th overall in passenger spend rate. Hartsfield-Jackson Atlanta International Airport ranked 3rd in sales per square foot, but 22nd out of the top 25 air- ports reporting data in sales per enplaned passenger. Both airports are among the most chal- lenged in terms of providing concession space to meet demand and could undoubtedly produce higher average sales per enplaned passenger (and revenue per enplaned passenger) if more space were available for concessions. 5.1.6 Optimum Productivity The optimum productivity is the highest amount of space consistent with not losing a sale as a result of congestion. Unfortunately, a mathematical model cannot be used to determine the perfect number. The optimum productivity varies by airport and by concession type. As traffic grows, sales can be lost due to congestion during peak periods, when passengers may bypass a

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74 Resource Manual for Airport In-Terminal Concessions Figure 5-13. Example of blade sign (San Francisco International Airport, Terminal 2). Importantly, except at the productivity levels of nonhub airports, even the low end of typical productivity ranges typically provides a revenue stream to the airport enterprise that will exceed the costs of constructing and maintaining the floor space. Table 5-11 presents an example of a financial analysis showing the internal rates of return (IRRs) for analysis of various combina- tions of expected sales per square foot, percentage rent, capital costs for terminal space, and oper- ating and maintenance expense. This type of analysis should be customized for the expected sales, costs, and rent structure of each airport. In this example, low productivity from food and beverage spaces and low percentage rent would produce low returns, with an exceptionally long payback period and a low IRR. Other concession categories achieve reasonable paybacks and internal rates of return. This suggests that there is an oversupply of food and beverage space that will not be profitable at an average productivity of $500 per square foot. Source: AirMall® USA. Figure 5-14. 3-D concession signage (Baltimore/ Washington Thurgood Marshall International Airport).

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Developing the Concession Space Plan 75 Figure 5-15. Concession directory (Washington Dulles International Airport). Table 5-11. Internal rate of return for various combinations of productivity, rent percent, and terminal capital and operating and maintenance costs. Annualized Payback @ 5.5% Productivity Percentage IRR Category Rent ($/SF) Capital & Real Interest ($/SF) Rent (real) Operating Costs (Years) Food High $1,200 12% $144 $85 8.0 14% Low $500 9% $45 $49 27.0 1% Retail High $1,600 17% $272 $85 3.5 32% Low $900 10% $90 $49 6.0 18% Duty Free High $1,600 28% $448 $85 1.9 55% Low $900 15% $135 $49 3.5 32% IRR = Internal rate of return SF = Square foot Source: LeighFisher.

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78 Resource Manual for Airport In-Terminal Concessions costs and secure inventory control, these machines can operate in lower-traffic areas, operate 24 hours per day, extend the range of merchandise offered, and provide incremental revenues without capital investment on the part of the airport operator. Machines can also be easily relocated, requiring shorter lease terms and no buyout requirement if the space is needed for other purposes. While most often used for specialty retail, these machines can also fill other needs. For exam- ple, at San Francisco International Airport, these sophisticated vending machines have been installed outside of the international arrivals area, where they offer travel necessities and personal care items as a service to passengers arriving on late night and early morning flights.