Food and Beverage and Retail Operators: The Costs of Doing Business at Airports (2017)

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8 The objective of this synthesis was to identify common operating costs of doing business among food and beverage and retail operators. A brief e-mail and a two-question survey were sent to all airports (more than 50) listed in the 2014 Airport Revenue News (ARN) Fact Book to gauge their willingness to complete the full survey. Six airports expressed interest and were sent the in-depth survey question- naire. Nine additional airports of varying sizes and operating models were asked to participate in the survey to help ensure a more robust sample. A similar questionnaire was e-mailed to all the airport concessionaires listed in the ARN Fact Book. As is typical of on-line surveys, the response was low: Only two airport concessionaires responded; so an additional concessionaire was asked to partici- pate to supplement the data. Developing the Survey QueStionnaire A draft questionnaire was developed based on feedback from the ACRP topic panel and an initial review of RFP documents and lease agreements from our panel airports: Hollywood Burbank Airport (BUR), Houston Bush Intercontinental (IAH), and Raleigh–Durham International Airport (RDU). The questionnaire included 15 multiple-part questions regarding six basic operating cost categories: employees, utilities, facility maintenance, customer service, local fees, and insurance. Respondents were also asked to describe other fees not included in the aforementioned categories. The draft ques- tionnaire was sent to the airport panelists and other airports for pre-testing, review, and refinement. The final survey questionnaire is reproduced in Appendix A. airport participantS Five small-hub, six medium-hub, and four large-hub airports responded to the survey (Figures 1 and 2). The 15 participants also represented a mix of concession management structures: • Prime operator, where one or more large concessionaires operate the majority of concessions; • Airport direct, where the airport leases individual or multiple units directly to various concessionaires; • Developer managed, where the airport delegates the responsibility of designing, managing, and leasing concessions to the developer, who in turn typically takes a share of the airport’s revenues; and • A hybrid combination of any of the earlier noted concession management structures. It is important to note that methods of communicating the costs of doing business at the airport may be different based on the concessions management structure. The lease agreement between the airport and concession operator—whether it be with a developer, prime concessionaire, or single space concessionaire—describes many of the operating costs and specifics the responsibility of who pays what. However, at airports with the developer model, it is the responsibility of the developer to communicate with tenants the operating costs for the said concessions. The developer issues a RFP and drafts a lease agreement. For airports with direct leases, the airport communicates operating costs through a variety of means, such as RFPs, pre-proposal presentations, lease agreements, tenant design standards (TDS), operating standards, and airport rates and charges. chapter two Survey MethoDology

9 Small 5 Medium 6 Large 4 FIGURE 1 Airport survey participants by hub size. Source: Unison Consulting (2016). FIGURE 2 Geographical map of airport survey participants.

10 conceSSionaire participantS To help confirm and supplement data provided by airport participants, the concessionaires listed in the 2015 ARN Fact Book were e-mailed a questionnaire (Appendix B). Responses were collected from Midfield Concessions Enterprises, Outstanding Hospitality Management Concessions Group, and Whitman May Enterprises/Uptown Airport Group. Survey FinDingS The questionnaire asked participants to indicate the types of costs required to operate at the airport, either paid directly to the airport or to a third party. employee costs As one of the requirements to work at the airport, all employees must comply with TSA require- ments. Employees must be fingerprinted and obtain proper airport identification (i.e., security badge) to maintain employment at the airport. Depending on the level of access that an employee is required to perform his/her job, additional classes and/or training may be needed to obtain the appropriate security clearance. For example, some employees may require access to drive on the airfield or access the docks to deliver or receive goods and merchandise. These employees generally must obtain additional security clearances compared with an employee who is working at a concession facility that is located pre-security. Fourteen (14) of the 15 respondents indicated that concessionaires incur the costs to obtain an identification badge for their employees, including fingerprinting application costs and badge fees (Figure 3). Twelve (12) of the 14 airports charge a replacement badge fee, and seven airports charge an annual renewal fee; consequently, high employee turnover can have a great impact for airport concessionaires. Further, there are ancillary hidden costs for concessionaires to ensure all employees have security badges. For example, at some airports, the lag time between submitting a fingerprint application and obtaining a badge can be several weeks. In the meantime, employees are not allowed to work on site, and in some cases may decide to accept another job rather than wait for the fingerprinting application to be processed. This results in even more turnover, and requires additional time and resources for the concessionaire to hire replacement staff. Employee parking is another cost that is required for most concessionaires to do business at the air- port. Airports have a designated parking site reserved for employees and most provide shuttles to and from employee parking; however, two of the 15 airports surveyed charge an additional fee to transport FIGURE 3 Employee costs paid by concessionaires. Source: Unison Consulting (2016). 1 1 2 7 12 14 14 14 Airside Vehicle Permit Employee Parking Hang Tag Transportation Fee Renewal Badge Fee Replacement Badge Fee Employee Parking Fingerprinting Application Badge Fee

11 employees from the parking site to the terminal building. One airport requires concessionaires to pay for employee parking hanging tags and airside vehicle permits. utility costs Utility costs are another item that are important for consideration in the overall financial model of an airport concessionaire. Airports have specific standards in terms of how utilities are connected, moni- tored, provided, and maintained. For example, one of the small-hub airports provides access to avail- able utilities at or to the perimeter of the leased premises. However, the material, means, and methods of connection are at the concessionaire’s expense and in accordance with the tenant design criteria manual. Eight of 10 utility costs listed in Figure 4 are paid by 12 of the 15 airports surveyed. The major- ity of airports (13 of 15) reported that electricity, grease removal for food and beverage concessions, and phone expenses are operating costs that are borne by the concessionaires. Trash and waste removal must be in accordance with the airport standards, which may be con- ducted only during specific times of the day. Further, as airports take on green initiatives, mandatory recycling programs are increasingly becoming standard operating procedure. For example, one of the medium-hub airport’s strategic goals includes becoming a zero-waste facility in the coming years. Concessionaires are responsible for transporting all garbage and trash to airport-designated refuse chutes, recycling bins, and compaction. Although the airport currently does not charge for garbage and trash removal, it reserves the right to do so in the future and to prorate the costs among all tenants. Facility Maintenance Fees paid by concessionaires Janitorial/daily cleaning, pest management, and routine and preventive maintenance are standard costs for operating any business on- or off-airport bounds, but may be higher at the airport. Some airports have more specific standards than others. For example, at one of the surveyed airports, the lease agreement requires concessionaires to set aside a percentage of annual revenues for light maintenance, painting, and annual clean-up. However, at another airport, the lease agreement states the concessionaire’s responsibil- ity is “to maintain the premises in good appearance, repair, and safe condition.” FIGURE 4 Utility costs paid by concessionaires. Source: Unison Consulting (2016). 1 3 8 9 10 11 11 12 12 13 Television/Cable/Satellite Recycling Plumbing Water Trash and Waste Gas IT/Internet Phone Grease Removal* Electricity *Applies only to F&B concessions.

12 Most of the airports, 12 of 15, require concessionaires to refurbish the facilities midway through the lease term (Figure 5). Generally, the airport sets a minimum mid-term refurbishment requirement on a per-square foot basis or as a percent of the initial capital investments. Shorter-term lease agreements may not require specific mid-term refurbishment costs, but leave refurbishment decisions at the discre- tion of the concessionaire or at the request of the airport director. Some airports have refurbishment provisions that require concessionaires to set aside an amount annually for the continuous upkeep and maintenance of the facilities. Kitchen hood cleaning and replace- ment is a common requirement food and beverage concessionaires; pest management and janitorial/ daily cleaning is not necessarily explicit in the lease agreements but is required to maintain facilities in a clean and quality condition. For concessionaires who share common areas, such as a food court, an airport may require all operators to pay a common area maintenance (CAM) fee for janitorial services. At two airports, operators have annual refurbishment requirements that are part of their lease agreement. customer Service costs paid by concessionaires To ensure the highest level of customer service some airports have specific standards in operation. Figure 6 provides information on customer service fees typically charged to concessionaires. The major- ity of the airports have stipulations in the lease agreement that require concessionaires to maintain per- formance standards or be assessed liquidated damages, violations fees, or penalties for non-compliance. As reported by airports, examples of lease violations include non-compliance to hours of operation; fail- ure to maintain concessions in a clean and safe condition or to perform required repairs; non-compliance to the pricing policy, as well as delayed construction schedules; and late reports or payments. More than half the airports require concessionaires to pay a marketing fee, which is most commonly used for a joint marketing fund to advertise and promote concessions. In some instances, the marketing fee is used for the cost of conducting mystery shopping surveys, but in other cases the cost of conducing a mystery shopping survey is the responsibility of the concessionaire. Airports with more stringent pricing policies require concessionaires to submit pricing comparison surveys annually or bi-yearly. A couple of airports indicate concessionaires pay a separate cost for customer service training. Concessions operators, whether large master concessionaires or single unit operators, likely have different types of internal customer service standards and practices that they employ, and the execu- 2 6 8 9 11 12 12 Annual Refurbishment Common Area Maintenance Janitorial/Daily Cleaning Pest Management Roune and Prevenve Maintenance Mid Term Refurbishment Kitchen Hood Cleaning and Replacement* *Applies only to F&B concessions FIGURE 5 Facility maintenance fees paid by concessionaires. Source: Unison Consulting (2016).

13 tion of these standards and practices could affect business costs for each entity. However, there was no data captured in the development of this synthesis report adequate to document the differences and potential effects on costs. In addition, airports would likely be unable to include these costs in the information they provide, as they are variable and internal concessionaire generated costs. location-Specific costs paid by concessionaires The costs illustrated in Figure 7 are not necessarily unique to operating at an airport but are specific to the local area. It is important to not these costs may differ based on geographic area and may be significantly higher at the airport than at off-airport locations. Concessionaires, whether operating at the airport or off-airport, are faced with local business taxes, permits, health inspections, and in some cities, living wage requirements. It is also important to note that airports may require additional permits related to security or construction, which add to the overall operating costs paid by airport concessionaires. other costs paid by concessionaires At most airports, concessionaires are required to provide a performance bond (Figure 8). The purpose of the bond is to help guarantee that the concessionaire will maintain and operate services according to the terms of the lease agreement. Performance bonds are generally based on the concessionaire’s FIGURE 6 Customer service costs paid by concessionaires. Source: Unison Consulting (2016). 1 2 6 8 11 Mystery Shopping (not included with marketing fee) Customer Service Training Pricing Comparison Surveys Marketing Fee Compliance Violation Fees/ Penalties FIGURE 7 Unique location specific costs paid by concessionaires. Source: Unison Consulting (2016). 1 6 8 10 Living Wage Health Inspections Permits Local Business Taxes

14 minimum annual guarantee. Additionally, most airports charge concessionaires for storage and/or office space. Airport concessionaires with a receiving dock are typically required to use, and pay for, central distribution services and deliveries. It is also important to access ancillary costs, such as those for coordinating and transporting goods to and from concession locations at certain times of the day and through security screening. In addition to requiring minimum annual guarantees or a percentage of gross sales, two airports require concessionaires to pay a privilege fee to operate on site. Only one airport reported that a security surcharge is required to help defray the cost of providing security. insurance requirements All airports require concessionaires to carry comprehensive general liability and worker’s compen- sation insurance (Figure 9). The majority of airports also require comprehensive auto liability, liquor liability coverage, and builders’ or contractors’ insurance. Individual airports may require more specific coverage, such as environmental impact insurance or business interruption insurance. FIGURE 8 Other costs paid by concessionaires. Source: Unison Consulting (2016). 1 2 4 11 13 14Performance Bond Support Storage Space Office Space Central Distribution and Delivery Fee Privilege Fee (not MAG or % rent) Security Surcharge 8 9 13 15 15 Builder's or Contractor Insurance Liquor Liability Coverage Comprehensive Auto Liability Worker's Compensation Insurance Comprehensive General Liability FIGURE 9 Insurance requirements. Source: Unison Consulting (2016).

15 communicating operating costs The costs involved in airport operations are generally detailed in concessionaire lease agreements. Often. TDS, pricing policies, and customer service standards are provided as exhibits in the lease agree- ments. During the RFP process, in the document as well as at pre-proposal conferences, airports try to provide concessionaires with as much information as possible regarding the costs required to operate at the airport. Some airports even have “Concession 101” workshops to help parties who are interested in entering the airport environment for the first time understand the challenges and intricacies of operating at the airport. Airport-wide fees, such as badging, parking, and storage or office space are detailed in airport rates and charges, and in some instances in the RFP and lease agreements. Four out of 15 airports hold monthly tenant meetings to allow concessionaires a forum to ask questions or express concerns. Only a few air- ports have tenant handbooks (an example from Tampa International Airport is provided as Appendix E) that detail operating standards and some costs required for concession operations (Figure 10). FIGURE 10 Communicating operating costs. Source: Unison Consulting (2016). 2 3 4 6 12 15 Outreach Meetings Tenant Handbook Tenant Meetings Airport Rates and Charges List During RFP Process Lease Agreement