In a paper issued this past week by Andrew Weddig, executive director of ARRA, the organization asks airports to 1. Waive contract restrictions on the frequency of price changes; 2. Waive contract approval requirements of price changes; and 3. Adopt adaptive pricing that permits individual concessionaires to respond as necessary to cost pressures and market conditions.
Concessionaires face labor shortages, increasing labor costs, passenger volumes and sales still generally below 2019 levels, and increased debt obligations, said Weddig. Airport restaurateurs and retailers are now operating at break-even cash flows at best.
Adding to these challenges is the current threat of high inflation. Weddig said: “The headline Consumer Price Index (CPI) inflation rate reported for March by the U.S. Bureau of Labor Statistics was 8.5% over the past 12 months. This is the highest rate of inflation in 40+ years. Further, the magnitude of cost inflation for restaurateurs and retailers has been extraordinary, even exceeding consumer price inflation.
“Since March 2021, the Producer Price Index for food & alcohol wholesaling increased 10.2%; the index for merchant wholesalers of non-durable goods, 10.7%. Each of these is representative of the increases in costs of goods airport concessionaires (and all food service and retail businesses) are experiencing,” he said.
“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,” he argued, especially since most concessionaires are not able to increase prices to offset increasing costs because “market basket” pricing rules restrict price changes to once or twice a year.
“Any cost increases between permitted price changes shrinks profits and is lost forever to the concessionaire…”
In this scenario, ARRA is urging airports to allow individual concessionaires to independently manage their own prices in a manner that best fits their revenue and cost conditions.
“More adaptable pricing will allow concessionaires to mitigate the financial impact of inflation as they work their way out of the financial impacts of the pandemic. ARRA encourages airports to adopt adaptive pricing to support their concession partners during these economically challenging times,” he said.