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AIRPORTS LOOKING MORE AND MORE LIKE TOP-END MALLS

BY STEVE McLINDEN

Ronald Reagan International Airport, Washington, D.C.

Airports, to some retailers, are the new frontier.

Not long ago, airport retail provided passengers with little more than muddy coffee as they trudged down the drab corridors of terminals with their newsstand purchases slipping from beneath their arms.

Today’s designer-coffee-toting traveler strolls past row upon row of brightly lit storefronts, local restaurant favorites, spas, clothiers, flower kiosks, museum shops and microbreweries, amid a growing stock of national name brands.

Despite this progress, however, the new shopping frontier remains very much a work in progress, as developers tweak and re-tweak their offerings at major U.S. airports, many of which have been transformed into mini — and not so mini, in some cases — malls over the past decade.

“As much as we realize we know very little about the airplane industry, airlines are realizing they know very little about the retail business,” said John Schroeder, co-COO of Westfield America Trust, which develops and manages concessions at nine major American airports. “And we are seeing a lot of them starting to outsource retail.”

Dramatic changes swept airport retailing when long-term, 20-to-30-year concession contracts began expiring, says Pauline Armbrust, editor of Airport Revenue News. “It made airports realize more and more that with capital investment, good customer service and good pricing, plus a little imagination, they could generate some attractive revenue.”

Airport retail is an estimated $3.5 billion a year business nationally, but still ranks third behind airport parking and rental cars in airport concession revenue, says Armbrust. However, with the number of enplanements (the industry term for airplane boardings) slackening post-Sept. 11, airports are finding creative ways to coax retail dollars out of their core travelers. Those travelers find themselves with more “dwell time,” because of stricter security and also because fear of getting stuck in long lines gets them to the airport earlier.

Glitzy retail expansions to capture this commerce are either being planned or already under way at a number of airports, including Dallas/Fort Worth, Orlando and Seattle-Tacoma (Sea-Tac). “Nine percent of revenue for operating the airport comes from concessions,” says Carolyn Fennell, a spokeswoman for Orlando International whose concessions are managed by Westfield Concession Management, in partnership with HMSHost and Gilchrist Enterprises.

“At a time when passenger traffic is still in recovery, that provides a revenue steam which allows airlines to keep expenses lower and fares lower. Everybody wins.”

Though virtually all major airports have diversified their concessions, there’s still room for improvement, says Ira Weinstein, president of White Plains, N.Y.-based Airport Interviewing & Research. Marketing remains surprisingly weak among airport retailers, he says. “They spend virtually no money on promotion and, until recently, have resisted the use of credit and debit cards,” Weinstein said. “And the signage is generally bad, and every store seems to scream out at you. … There is a general need for fresh ideas from outside the airport world.”

Airports should turn to traditional mall developers and managers whenever major development opportunities present themselves, Weinstein adds.

But so far, only a few mall development firms have stepped forward to tackle the intricacies of airport retail. That may be in part because of the administrative headaches inherent in the elaborate and often costly request-for-proposal process at most airports, says Gregory Maloney, SCSM, president and CEO of Jones Lang LaSalle Retail.

In addition, traditional malls cater largely to female shoppers, especially in fashion. But though the number of female business travelers has risen, the majority of frequent flyers are still male, and their buying habits are tougher to track, Maloney says.

“Also, nine out of 10 retailers don’t want to be in [just any] given terminal — they want to be in the top five in the country,” he adds.

General Growth Properties subsidiary General Growth Management, a third-party manager of malls, apparently has no desire to tackle airport retail. “It’s just not something we’re pursuing now,” said spokesman David Keating.

Airports may be giving a little too much credit to revamped retail for recent sales increases, Weinstein says. “Actually, it’s happening because travelers have more time on their hands.”

Whatever the cause, the major airports that are upgrading or adding terminals are equipping them with copious amounts of retail and restaurant space.

Many credit a British firm for revolutionizing the American airport model. Fresh off a string of mass-merchandising successes at international airports that it either owned or managed, U.K.-based BAA introduced its sparkling Airmall to Pittsburgh International Airport in late 1992, complete with then-shocking “street pricing.” The Airmall concept, which featured airport store firsts for such national retailers as Brookstone, Creative Kidstuff, Gap, Johnston & Murphy and Timberland, as well as some of the more creative local vendors, quickly caught on at other airports.

“We had been practicing street pricing in the U.K. for years, not just because we’re nice guys, but because it worked,” said Mark Knight, regional director of BAA-USA.

Pittsburgh Airport officials initially said they’d accept street pricing, plus 10 percent, in their new concession management venture with BAA, says Knight. No dice, BAA responded. “It took some convincing … but they grudgingly came along to our line of thinking that it would have to have pure street prices.”

The result: Pittsburgh more than tripled airport retail revenues in a relatively short span. Over 11 years later it stands at the top in revenue, at $8.63 per passenger boarding a plane in 2003, according to Airport Revenue News, contrasted with the paltry $2.40 it was producing before BAA took over (see chart).

“The old-style airport was a low-volume, high-margin business,” said Knight. “They typically overcharged for a smaller selection. Now operators have to take less of a margin, but they are rewarded with high volume.”

Still, airport retailing isn’t quite like being at the mall for retailers. Though airport stores enjoy a lofty sales average of about $1,100 per square foot — about triple that of traditional malls — the blueprint for success remains a blurry one in this heavily nuanced business, where rents are at least 20 percent higher than street average.

Airport stores are much smaller than those in conventional malls and must often be shoehorned into tight, linear buildings not designed for retail traffic. Storage space is nonexistent. Traveler profiles vary. Employees must deal daily with long commutes, screw-tight security and remote parking, and they command higher pay as a result. Strategic gate proximity, akin to a prime street corner for standard stores, can lose its luster quickly as airlines constrict and traffic patterns change. Airports may be governed by port authorities, managing agents, middle agents or developer-operators, meaning the rules of retail engagement can differ greatly from city to city.

“Getting products to an airport store is a huge logistical challenge alone,” said Armbrust. “Hours of delivery are often limited. Trucks have to be packed a certain way. And it’s worse post-9/11. Everything has to be escorted by security.” Additionally, airports restrict store design, signage, product mix — nothing sharp is allowed — and sidewalk sales and substantive changes usually require the blessing of airport boards, she says.

These challenges have prompted such retailers as The Disney Store, Gap and Victoria’s Secret to scale back airport stores over the past few years. “We do have a few airport locations, but right now it is a strategy that we’re not pursuing,” said Gap spokeswoman Jordan Benjamin.

But for all these challenges, airport retail vacancies remain rare, say industry observers. Airports provide a new frontier for some national names that already blanket conventional markets. Borders, Brooks Brothers, Eddie Bauer, Sharper Image and Timberland are among those that have managed to create successfully condensed airport stores.

Brookstone, which sells travel items ranging from luggage to noise-reduction headphones, has 28 airport stores, amounting to about 12 percent of its total 257 units. “Airport stores allow us to reach a good target demographic, and that’s the business traveler with a higher level of income and education who is naturally drawn to our stores,” said Brookstone spokesman Robert Padgett.

Brisk summer airport traffic helps mitigate softer summer mall sales and helps fortify the retailer’s catalog mailing list, Padgett says. “Airport stores tend to generate business all year.”

To be sure, the chain can no longer hawk some of its best sellers, “including pocket knives and anything sharp,” he said. “We obviously have had to make a few changes.”

Seattle-Tacoma hopes the new terminal shown in this rendering will boost retail sales.

One retailer born to fit tight airport sites is AltiTunes, a New York City-based seller of music, DVDs and other audio-visual products. AltiTunes squeezes up to 3,500 titles into a 750-square-foot store layout and has experienced double-digit sales growth each quarter since its founding in 1994, except the four quarters following Sept. 11, says Amy Wolf, owner and CEO.

The chain has 25 stores in 19 airports and plans to open eight units annually for the next several years, she says. “Music and movies are a great distraction for people who are nervous flying,” said Wolf, whose stores will offer “delayed-flight discounts” and other surprise specials.

Meanwhile, such “infotainment” concepts as CNBC News and the Fox Sports Bar & Grill continue to catch the eye of news-hungry transients, and an increasing number of fun/educational venues put creative gifts on shelves for those last-minute impulse buyers. Discovery Channel Store and National Geographic Store have national presence, while such concepts as The Smithsonian National Zoo Store, at Washington National, The Field Museum Store, at Chicago’s O’Hare International and the Universal Studio and Kennedy Space Station stores at Orlando International add local texture.

A deft blend of national shops and well-known regional retailers and restaurateurs seems to work best, Westfield officials say.

“There were too many unimaginative, cookie-cutter retail concepts in major airports, and they had become a bit sterile,” said Tim Lowe, Westfield executive vice president of development. “A lot of business travelers saw the same things over and over. Inevitably, that cuts into your sales.”

Sea-Tac, currently No. 29 on the Airport Revenue News list of top performers, hopes a new terminal and renovated concourse set to open in 2005 will improve its stature. The airport will add about 35,000 square feet of dedicated retail space plus a new food court where patrons can dine beneath a 40-foot-high atrium and gaze out a giant picture window. HMSHost, whose long-term contract with Sea-Tac will expire in early 2005, will share concession operations in the new terminal with Hudson News and Concessions International. Locally made products, artsy gift shops and stores within stores will dot the terminal, as will national chains offering hybrid regional versions of their products, Sea-Tac officials say.

Nationally famous Ivar’s Chowder House will also open a restaurant.

“We looked at Portland and other locations around the country, as well as in Vancouver and in Europe, for ideas,” said Kottayam Natarajan, Sea-Tac’s general manager of aviation business development. “We really want to capture the look and feel of the Pacific North.”

Dallas/Fort Worth’s disparate terminal buildings really haven’t been conducive to a collective shopping experience thus far, but that could change in the spring of 2005, when the planned Terminal D and its 35-store, village-themed shopping court opens. “There will be higher-end shops, apparel, accessories, jewelry, pottery and a museum shop that will offer the best of all museums in the Metroplex,” said Pat Gleason, the airport’s vice president of revenue management. Dallas/Fort Worth manages its own retail operations; individual operators vie for openings through requests for proposal.

Terminal D will be connected to other terminals through a new Skylink transit system, so Gleason expects ticketed visitors from elsewhere in the airport to stop by as well.

Another new village-themed development, now open in the central terminal at Montréal’s Dorval International Airport, was designed to resemble storefronts in Old Montréal.

At Orlando Airport, a new food court that opened in November features a 3,000-gallon aquarium and two lighted domes as part of restaurant-retail redevelopment that will be completed in late 2004. Krispy Kreme Doughnuts has its first fully automated airport shop there. An Asian concept, Zyng Noodlery, is also an airport first. “As airport passengers are receiving less food on the planes, food concepts in the airports are becoming more and more important,” said Fennell.

Walt Disney’s World Resort Earport, the newest retail tenant there, will soon be joined by a dozen other shops, including Alien Attack, Swatch and a spa that offers massages, facials and similar services. The new shopping and eating areas are designed to support the airport’s “Orlando Experience” theme.

“People say you’re now seeing an airport built around a shopping center instead of vice versa,” said retail consultant Ian F. Thomas of Vancouver, British Columbia-based Thomas Consultants. “It used to be our job to get people in and out of airports without distraction. Now we have created a conducive environment where everybody has time on their hands and they see stores and price points they like. It’s almost like re-creating Main Street once again.”

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