Title
Airport Concession Street Pricing Policy (Ordinance S-45222)
Description
Request to authorize the City Manager, or his designee, to make a modification to the Airport Concession Street Pricing Policy to a "Street Plus 12 percent" pricing model, and require all concession operators to implement alternatives to reduce costs, and amend all concession contracts accordingly.
Report
Summary
Two master food and beverage concessionaires at Phoenix Sky Harbor International Airport, SSP America (SSP) and HMSHost (Host), have requested a modification to the current Airport Concession Street Pricing Policy (Policy). The City established the Policy in 1996 in response to airport customers believing they were being overcharged for food, beverage and retail merchandise at the Airport. The goal of the Policy was to maintain consistency in the quality and pricing of products offered at the Airport with comparable products offered at approved off-Airport street locations. Therefore, the Policy was referred to as a “Strict” Airport Street Pricing Policy.
In mid-2015, at the request of SSP and Host, the Policy was amended to “Street Plus 10 percent.” At that time, operators cited increased cost in labor and the cost of goods sold to support amending the Policy. The amended Policy provided financial relief to SSP and Host. In 2017, Council awarded SSP and Host an opportunity to add a total of four additional food and beverage kiosk locations to their Terminal 4 contracts. Those units are projected to generate close to $1 million each in annual sales with approximately $600,000 in additional cash flow to SSP and Host.
Recently, SSP and Host requested an additional change to the Policy from “Street Plus 10 percent” to “Street Plus 15 percent” to cover projected higher labor costs associated with the increase in minimum wage requirements and increased demands from organized labor.
The Aviation Department (Aviation) requested additional financial information from SSP and Host to substantiate the request for a five percent increase in the Policy. Aviation’s concessions consultant reviewed the financial information and concluded that the two companies have different operating ratios and cash flows, though sales projections are similar for both entities. SSP and Host’s annual operating profits are projected to remain positive without a price increase.
Pricing policies are impacted by many factors. Generally, airports make pricing policy decisions based on local circumstances that consider sales, rent, type of passenger, disposable income, labor rates, capital investment and construction costs, lease term, and other occupancy fees. SSP and Host point to the strong US economy operating at 3.7 percent unemployment and Arizona’s rising minimum wage as the primary factors for supporting their request. SSP and Host currently have the ability to adjust their prices as comparable street side locations also adjust to accommodate increased labor costs. The Food and Beverage program on average generates approximately $1,900 per square foot, which is favorable for the vendors when compared to other similar-sized airports. Sales per square foot is the metric operators look to maximize, because high sales per square foot generally maximizes profits.
During the past year, concession opportunities were solicited for Terminal 3 with current economic factors and new wage laws being well known. The solicitation documents outlined in detail the Policy and other terms, so all potential proposers could create solid financial proformas before the proposals were submitted. SSP and Host project that their labor costs will increase $1 million to $1.5 million per year. These incremental costs over the five-years remaining on their Terminal 4 contracts are projected to total between $5.2 to $7.8 million for each company. A straight five percent increase as requested could result in approximately $32.4 million in additional sales, for both companies, which is $19.4 million more than the estimated $13.0 million needed by Host and SSP to cover projected increases in labor costs.
In consideration of the request from SSP and Host, staff recommends all concession operators implement additional alternatives to reduce costs such as deleting low volume menu items, trimming excess costs (i.e. reviewing overhead and intercompany charges), and implementing marketing programs to promote underperforming units (i.e. happy hour menu during off-peak periods, special events, and the adoption of innovative technology methods to market and operate their businesses). Once these initiatives are taken by all concession operators, the City would allow no more than an additional two percent to be added to the Aviation Concession Street Pricing Policy to “Street Plus 12 percent”. Any changes to the Policy would extend to all retail and food and beverage concession contracts for consistent application of the Policy.
Financial Impact
Revenue to the City for the remaining years of the T4 Food and Beverage contracts is estimated at approximately $120 million.
Concurrence/Previous Council Action
This item was recommended for disapproval by the Phoenix Aviation Advisory Board on Nov. 15, 2018, by a vote of 5-2 against.
This item was presented to the Aviation and Transportation Subcommittee on Nov. 27, 2018. After discussion, the Subcommittee unanimously voted to recommend to discontinue the Airport Street Pricing policy and instead allow market competition between food and beverage operators to guide the pricing. The Subcommittee also requested that the food and beverage operators submit revised pricing menus to Aviation staff by Jan. 30, 2019 and that the new pricing menus be effective by July 15, 2019.
Location
Phoenix Sky Harbor International Airport, 3400 Sky Harbor Blvd.
Council District: 8
Department
Responsible Department
This item is submitted by Deputy City Manager Deanna Jonovich and the Aviation Department.