food & beverage & retail concession assesssment

7/30/2019 Food & Beverage & Retail Concession Assesssment

1/27

FO O D /BEVERA G E A N D RETA IL C O N C ESSIO N

PERFO RM A N C E A SSESSM EN T

D A LLA S/FO RT WO RTH IN TERN A T IO N A L A IRPO RT

Final Presentation
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2/27

Purpose of Study

Review D FW food/beverage and retail concession financial results

and compare to available industry data

Review D FW concessionaire loans

C ompare key D FW concession contract terms and conditions vs.

off-airport and peer airport locations

D iscuss airport concession management structures

Provide findings on D FW terminal concessionaire construction

costs

Identify good street pricing validation process procedures


3/27

Introduction

In 2003, D FW ranked 45 out of

the top 50 performing N orth

A merican airports with sales

per enplaned passenger of

$5.43

By 2007, D FW had improved

its ranking to #34 and its salesper enplaned passenger by

almost 40% to $7.52

F&B AND RETAIL SALES PER ENPLANEMENT 2007

$2.76

$3.83

$4.80$5.10

$5.21

$5.26

$5.32

$6.10

$6.16

$6.21

$6.37

$6.40

$6.50

$6.51

$6.65

$6.68

$6.77

$6.85

$7.01

$7.15

$7.20

$7.30

$7.52

$7.52

$7.55

$7.65

$7.84

$7.86

$8.01

$8.03

$8.10

$8.11

$8.15

$8.16

$8.35

$8.38

$8.46

$8.47

$8.58

$8.62

$8.82

$8.83

$9.13

$9.46

$9.47

$9.59

$10.53

$10.79

$11.44

$13.60

HOU

PDX

KCIDAL

ONT

IAH

SJC

CLE

RDU

BNA

STL

OAK

AUS

FLL

CMH

SAT

MKE

SNA

SMF

ATL

CVG

SLC

MEM

DFW

MDW

CLT

SAN

ORD

BWI

IAD

IND

PHX

LGA

PHL

TPA

MSP

DCA

DEN

RSW

LAX

MCO

DTW

BOS

LAS

SEA

MIA

EWR

JFK

SFO

PIT

6


4/27

Sales H istory

The opening of T erminal D resulted

in a decrease in passengers in other

terminals (see chart, top right).

Still, between 2003 and 2007

concession sales increased in 3 of

the 4 terminals:

- T erminal A + 20%- T erminal B + 30%

- T erminal C + 12%

Sales in Terminal E declined by 21%

(but rent relief was granted)

Sales per sq ft also increased in 3

out of 4 terminals (see chart, bottom

right).

DFW Food and Beverage Sales per Square Foot

2003 vs 2006

$927

$698

$1,392

$721

$995

$826

$1,665

$812

$364

Terminal A Terminal B Terminal C Terminal D Terminal E

2003

2006

Source: 2004 and 2007 ARN Fact Book . Data are for 2003 and 2006.

+7.3%

-49.5%

+19.6%

+18.2%

Change in Share of DFW Enplanements

2003 versus 2006

-4.2%

-2.1%-0.5%

19.0%

-12.3%



5/27

D FW C oncessionaire Survey Responses

Financial information was received and analyzed for 111 locations

The concessions were separated into 5 categories

- Full Service Restaurants (6 locations)

- Q uick Service Restaurants (34 locations)

- Bars (7 locations)

- N ews/G ift (23 locations)

- Specialty G ift (41 locations)

A pproximately 25 concessionaires (45% of stores) did not respond


6/27

Full Service Restaurants at D FW

A verage D FW sales per square foot

of $854 is much higher than off-

airport locations (see chart, right)

85% average ratio of operating

expenses to sales is below off-airport

locations (T exas all restaurants

median is 89.8% ; A ll full service

restaurants median is 95.6% )

Large depreciation and corporate

expense allocations result in to

operating loss reported at 1 location

Median Sales per Square Foot

Full- and Limited-Service Restaurants

Airports versus Other Locat ions

$280

$422

$400

$269

$272

$314

$468

$252

$379

$1,242

Full service - all

Full service - upper

quartile

Full service -

hamburger

Full service-

American (varied)

Full service - other

Limited service -median

Limited service -

upper quartile

Limited service -

sandwiches/sub/deli

Limited service - all

other

Large airports - F&B

average

Source: Restaurant Industry Operations Report 2007/08 , published by National Restaurant Association and Deloitte &Touche.


7/27

Q uick Service Restaurants at D FW

A verage sales per square foot of

$1,082 is much higher than off-

airport locations. (see chart, right)

79.6% average ratio of operating

expenses to sales is below

comparable off-airport locations

(T exas all restaurants median is89.8% ; Limited service restaurants

(multi-unit, company operated)

median is 82.0% )

O ne multi-location concept

reflected poor financial results

regardless of location

Sales per Square Foot Comparison

DFW, Large Airports, and Non-Airpor t

Limi ted- and Full-Service Restaurants

$1,242

$995

$826

$1,665

$812

$364

$422

$468

Large AirportAverage

Terminal A

Terminal B

Terminal C

Terminal D

Terminal E

Full service - upper

quartile

Limited service -

upper quartile

Source: 2007ARN FactBook andRestaurantIndustr O erationsRe ort200708 ublishedb

Non-Airport


8/27

Bars at D FW

A verage sales per square foot were $822 in the most recent

year- Lower sales per sq ft than quick-serve restaurants, but

much larger in area

Bars have higher margins than other F& B facilities, andhigher percentage rents

N o off-airport data comparison sources were available

Sales exceeded total operating expenses at all locations


9/27

N ews/G ift at D FW

A verage sales per square foot were $1,455 in the most recent year

This compares with large airport average of $1,212.

N o off-airport data comparisons were identified

- A irport news/gift shops are a unique category with a uniquemerchandise mix of low-margin news and high-margin gifts

A ll concessionaires showed operating profits, but losses werereported for 3 individual locations


10/27

Specialty Retail at D FW

A verage sales per square foot of

$975 is much higher than off-

airport locations

- M edian for top 10% of U.S.

enclosed shopping centers =

$536)

94.9% average ratio of operating

expenses to sales is comparable

to off-airport locations

- Barnes & N oble, Body Shop,

Brookstone and Fossil annual

reports were reviewed

3 of the 13 concessionaires that

reported in this category showed

operating losses

Comparison of Specialty Retail

Sales per Square Foot 2003 - 2007

$906

$664

$785

$492

$901

$571

$923 $930

$394


2003

2006

Source: 2004 and2007ARNFactBook Data arefor 2003and2006

-0.5% +17.5%

-14.0%

-20.0%


11/27

C oncessionaire Financial Results Summary

Sales per square foot at D FW significantly exceed off-airport

restaurant industry medians

H igher on-airport operating expenses (e.g., rents) are offset bythe greater sales potential at airports

O perating expenses to sales ratios at airport concessions

compare favorably with off-airport restaurant and specialty retail

locations

Financial results of comparable off-airport bars and news/gift

locations could not be located

C oncessionaire financial results at other airports were not

available (proprietary information)


12/27

C omments on Financial Results

It is not uncommon for some businesses to fail in any shoppingenvironment

Various controllable factors may contribute to poor financialresults (e.g., management, customer service, product quality)

But, uncontrollable factors (e.g., contract terms, airline gatereassignments, passenger traffic flow) can also contribute

It is the airport operators job to create fair and reasonableopportunities for success but total success cannot beguaranteed


13/27

Loans to D FW C oncessionaires

31 loans were disclosed by the D FW concessionaires (15 quick

service restaurants; 1 bars; 10 news/gift; 5 specialty retail)

Range of loan amounts is quite large ($25,500 - $1.7M )

Some concessionaires have multiple loans

Typical term of loans

- Full service restaurants none provided

- Q uick service restaurants 7 years

- Bars insufficient data received

- N ews/gift 5 years

- Specialty retail 3 or 5 years


14/27

C omments on Loans

Lenders loan decision affected by:

- Perceived risk

- C ash flow estimates,

- Profitability projections,

- Economic factors,

- Pre-existing business relationships,

- C ollateral and

- O ther factors

C ommercial loans for leasehold improvements typically run 5 7years; A mortization period may be longer requiring balloonpayment or renegotiation at end of term

N o difference in on-airport versus off-airport loan conditions couldbe discerned

Loan payoff usually has huge result on concessionaires cash flow

- Usually 3% to 4% of sales (equal to 20% to 30% of net income)

C omparisonsof D FW C oncession Practices to


15/27

C omparisons of D FW C oncession Practices to

O ther Locations

Information was gathered to compare D FW concession businesspractices to those at comparable on and off airport locations inthe following categories

1. Rent

2. Term Length

3. Hours of O peration

4. Pricing Policy

5. M anagement Structure

6. C onstruction C osts

1


16/27

1. Rent

O ff-airport percentage rents are often 5% or more below lower

than on-airport

- However, sales are often 3 or 4 times higher on-airport M inimum rent is typically much higher on-airport, again offset by

higher sales

O ff-airport rents differ greatly based on demographics in the store

vicinity

- e.g., strip center versus super-regional mall or high-end

shopping street

O ff-airport rents are typically negotiated (not publicly tendered)

Rent ranges at D FW were reasonably within the rent ranges

reported by the peer airports in all categories

2 T L h O ff A i


17/27

2. T erm Length O ff-A irport

Restaurants and bars typically carry terms of at least 7 years at off-

airport locations

20-year terms are common when stand-alone facilities areconstructed

Specialty retail terms may be shorter due to lower capital

investment requirements

Lease versus Own Full- and Limited-Service Restaurants

30.9%32.3%

5.4%

0.4%

31.0%

18.8%

35.0%

4.3%

1.7%

40.2%

Own land and building Lease land and building Lease land and ownbuilding

Own land and leasebuilding

Not specified

Full Service Restaurants

Limited Service Restaurants

Source: Restaurant Industry Operations Report 2007/08 , published by National Restaurant Association and Deloitte & Touche.

T i l L th f T i A i t


18/27

T ypical Lengths of T erm in A irport

FO O D A N D BEVERA G E Full Service Restaurants

Q uick Service Restaurants

Bars

RETAIL N ews/gift

Specialty Retail

PEER A IRPO RTS

7 -10 years

7 -10 years

7 10 years

5 7 years

5 7 years

Note: IAH grants 5 7 year base terms for quick service restaurants and bars, but alsoincludes 3 one-year term extensions which are typically exercised.

D FW

10 years

5 years

5 10 years

5 years

5 years

3 H f O ti


19/27

3. Hours of O peration

D FW hours of operation policy (based on flight departures) isconsistent with peer airports

Hours are considerably shorter in most malls and other shoppingcenters (e.g., 10 a.m.- 9:30 p.m.)

O nly stand-alone quick service restaurants may have comparableopening times and longer hours

- Example: M cD onalds 0600-2200

4 P i i P li


20/27

4. Pricing Policy

Landlords at off-airport locations do not establish pricing policies

for their food/beverage or retail tenants

- C ompetition results in price discipline, competitiveness

D FWs street + 10% policy is consistent with many other airports

- 10 of 23 airports surveyed indicated street pricing + 10% policy

- 9 had street pricing without markup

- 4 indicated no street pricing policy (or no pricing policy at all)

In general, we believe airport industry pricing policies are

inconsistently enforced, particularly airports claiming true street

pricing

Pricing policies are particularly important where there is limited

competition, e.g., dominance by a few major concessionaires.

5 A irport M anagement Structures


21/27

5. A irport M anagement Structures

T here is no single right or wrongapproach each airport solves forits own goals

D FW employs a direct leasingprogram

Peer airports use each of thefollowing approaches:

- D irect leasing- D eveloper

- M ultiple prime concessionaires

- M aster concessionaire

D irect leasing is used by 13 of thetop 20 large airports

11 airports use a combination ofapproaches

Rank Airport Direct Primes Developer Master

1 ATL X

2 ORD X X

3 LAX X X

4 DFW X5 DEN X

6 LAS X X

7 J FK X X X

8 PHX X X

9 MSP X X

10 DTW X X

11 EWR X

12 MCO X X X

13 SFO X

14 MIA X X X

15 PHL X

16 SEA X

17 CLT X

18 IAH X X

19 BOS X

20 LGA X X X

Totals 13 14 8 0

Total hybrid (two or more management approaches) = 11

Source: Jacobs Consultancy from ARN Fact Book 2007 and airport management interviews.

Concession Management Approach20 Large Airports

M anagement Structure Primary Pros and C ons


22/27

M anagement Structure Primary Pros and C ons

D irect LeasingPros: M ost control, higher gross sales, higher revenue, more

opportunity for local businesses

C ons: H igh administrative costs, more management time requiredPrime O perator

Pros: Fewer contracts to manage, concessionaire experiencedwith subcontracting (e.g., A C D BE)C ons: Less competition, fewer operators

D eveloperPros: H igh customer satisfaction, highest gross sales, wide variety

of individual concepts

C ons: D eveloper fees reduce revenue to A irport

Top 3 Most Used Approaches

6 C onstruction C osts


23/27

6. C onstruction C osts

A irport construction costs exceed off-airport construction costs by

a significant margin (as much as 50% per industry sources)

- D elivery restrictions, security requirements, higher life-safety systemrequirements, other airport requirements raise costs

- C onstruction costs vary greatly based on design standards and

quality of finishes

D FW construction costs are generally within or below the peer

airports range of construction costs

D allas was ranked 47th of 51 major cities in the RSM eans

C onstruction Cost Indices (C C Is), January 2008, at 84.3% of thenational average

- January 2008 C C Is showed D allas with a year over year construction

cost increase of 4% and a quarterly decrease of 0.1%

H igh Build O ut C osts are C ommon


24/27

H igh Build O ut C osts are C ommon

RETAIL

DFW (Term D*) $464

LAX $530

MIA $415IAH $390

ORD $500

RIC $425

DEN $435

RETAILDFW (Term D*) $464

LAX $530

MIA $415

IAH $390

ORD $500

RIC $425

DEN $435

FOOD & BEVERAGE

DFW (Term D*) $537

LAX $680

J FK $665SEA $615

MIA $525

MEM $500

ORD $640

FOOD & BEVERAGEDFW (Term D*) $537

LAX $680

J FK $665

SEA $615

MIA $525

MEM $500

ORD $640

Increased tenant build-out costs are becoming more of an issue at airports acrossthe U.S. (D FW Terminal D construction costs exceeded those at other D FWTerminals)

- H igher development standards required in new terminals- LEED certification and other environmental requirements- Typical ratio used by concessionaires of first-year projected sales

Some recent build-out costs per sq ft at U .S. airports:

*Quick-Serve*News/Gifts

Recommendations


25/27

Recommendations

Term Length - Five (5) year contract terms for quick servicerestaurants without extension options are not typical in the

industry. A seven (7) year term for quick service restaurants is

recommended.

C onstruction - D FW should periodically review its policies andpractices to ensure concessionaires do not spend more than is

necessary to provide facilities that meet the D FW quality anddurability standards.

H ours of O peration - Review of sales during early morning andlate evening hours is recommended to determine if sales are

adequate to support the required hours of operation. If not,

keeping fewer units open may be an option.


26/27

G ood Street Pricing Procedures

Street Pricing - Price adjustments based on a recognizedeconomic indicator (e.g., C onsumer Price Index) for non-brandedconcepts may reduce staff monitoring workload and improveturnaround times on price requests, which are important toconcessionaires.

- Indexing provides objective standard where menu, merchandiseremains constant

- C onsider portion sizing, when applicable, in comparisons

- D evelop price increase request documentation requirements

- Enforce non-compliance penalties

- Establish and document appropriate location comparisons

- Set price review timeframes with flexibility for unanticipated,significant cost increases as needed

- For branded units, continue using off-A irport direct comparables


27/27

FO O D /BEVERA G E A N D RETA IL C O N C ESSIO N

PERFO RM A N C E A SSESSM EN T

D A LLA S/FO RT WO RTH IN TERN A T IO N A L A IRPO RT

food & beverage & retail concession assesssment

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