The Airport Restaurant & Retail Association (ARRA) this week urged airports to consider some pricing policy modifications as the airport concessions industry’s nascent recovery is threatened. Inflation, supply chain challenges and labor costs are all weighing heavily on concessionaires as they ramp up operations to serve growing numbers of travelers.
Andrew Weddig, executive director of ARRA said the higher-than-expected numbers of passengers returning to airports has been a welcome sign, but all is not well. The current economic realities are creating strong headwinds “just when it seemed like we were catching a little bit of a break and would be able to climb out of the hole that COVID kicked us into,” he said.
For now, as the industry seeks a new roadmap for airport-concessionaire contractual relationships, ARRA is asking for short-term fixes to what Weddig says is a growing problem. The trade group recommends 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.
“These modifications to contractual pricing rules will give concessionaires a measure of financial health – financial health that is threatened by the combination of cost inflation and restrictive pricing,” ARRA said in a web article.
ARRA pointed to cost inflation for restaurateurs and retailers that is in some cases exceeding consumer price inflation and nipping into double digits.
“With cost of goods as a percentage of sales ranging from 25 percent to 45 percent 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 web post said. “Moreover, it is not always possible to simply increase prices to offset increasing costs. In the case of airport concessionaires, many airport concessions contracts include pricing restrictions of some sort. 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.”
Weddig said the recommended waivers don’t fully address the larger challenges many airport concessionaires face in their contracts with airports. Those larger issues can be tackled over time, he says, but the pricing waivers would represent a short-term fix to an immediate problem.
“I said at [the Airport Experience] conference in Orlando that at the end of the day we need to fix prices and we need to fix capital,” Weddig explained. “But that’s longer term. Right now, we’ve got to get to the long term, and getting to the long term means recovering from the pandemic. What we are suggesting right now is that airports should wave during this period of elevated inflation.”
He added: “As we evolve the new model – and I’m sure that with the new model we will have to deal with those larger issues – but right now we’re just pointing out one particular area where airports can help their concessions partners at really no negative impact to the programs.”