Editor’s Note: The airport concessions industry is in a constant state of evolution. Against a backdrop of a robust economy that is spurring passenger growth at most major airports, food and beverage and retail sales continue to expand. But along with growth has come challenges, ranging from high investment costs to labor and wage challenges to the impact of technology on customer service. An excerpt of this interview ran in the April issue of Airport Experience News.

Ramon Lo, publisher of Airport Experience News, led the conversation that included Rick Blatstein, founder and CEO of OTG ; Derryl Benton, executive vice president of business development at HMSHost; Bill Casey, chief operating officer, Areas USA ; Roger Fordyce, CEO of Hudson Group , Kevin Kelly president of Delaware North’s travel hospitality division; Gregg Paradies, president and CEO, Paradies Lagardère ; and Michael Svagdis, CEO of SSP America. Following are the highlights from that conversation.

LO: Let’s first look inward. Can you each offer your assessment of the current state our industry?

BLATSTEIN: I think the industry is the strongest it’s ever been. We’re seeing enplanement growth like we’ve never seen before. The airline mergers are really starting to hit stride. We’re seeing infrastructure builds. OTG is 23 years old and I’ve never seen infrastructure builds like this in my career, and we’re going to see more. I’m really excited about the future.

BENTON: The industry is going to continue to evolve in a beautiful way. I also believe consolidation [will continue] on our side of the business as it relates to retail and food. I’ve been around long enough now where there were a lot more airlines [then] than there are today. I believe at one point there were seven or eight rental car companies, today there are the big four. [Consolidation will continue], but there will be small companies coming in as new players in the business. The future’s bright.

CASEY: I also think our future is bright. We’ve been in the United States 10 years, 51 years worldwide. We’ve grown to be a $350 million organization, between our motorway and our airport businesses. In the past there was the prime concessionaire, and now with [airports] breaking up contracts there’s great opportunity for companies like ours to go in. And we have, we think, the brands. With the enplanement growth year after year as the economy continues at this pace, we’ll all do very well.

FORDYCE: I think the industry is very robust and I think the outlook is very positive. I share Rick’s sentiments that the infrastructure building is a testament to the enplanement growth. Industry experts predict a doubling of enplanement growth in the next 20 years. I just hope the infrastructure can keep up. There will be rollercoasters of economic downturns in those 20 years and slippages as we’ve seen in the past, but the long-term outlook is very positive.

KELLY: When you look at those roller coasters, I do think the airlines have fixed their problems. They’ve consolidated. They’ve restructured their debt. They’ve bought new assets. They’re more efficient. The airports are investing, though probably not as quickly as they could and should, because we are going to outrun the capacity of our airports. More importantly, the consumer is in a good spot too. Millennials are coming into their own. The baby boomers are getting ready to spend the last quarter of their lives spending money and traveling and it’s all going to be experience-based. I think those three things together spell a great future for this industry. When you look at the compounded annual growth rate we’ve had over the last ten years and what we’re projecting out, why wouldn’t you invest in this industry?

PARADIES: The industry is strong, with many tailwinds and a few significant headwinds. Airline traffic and economy remain strong, which continues to positively impact the airport concessions industry. Approximately 80 percent of the airports that we operate in enjoyed traffic growth in 2018. Ultra-low cost carriers were a key reason for strong traffic growth. Headwinds include significantly higher labor costs due to living wage increases and other factors. Health insurance has also increased significantly. Paradies Lagardère supports higher wages and benefits, but the business agreements with our airport and brand partners need to support these higher costs, because there are only 100 cents to the dollar and concessionaires must earn a ROI to be successful. The [capital expenditure] costs to build retail stores and restaurants have also increased significantly due a strong economy and other factors. Exclusive airport beverage pouring rights agreements significantly limit the assortment to our customers. Newness and innovation is driving this important category and pouring rights agreements significantly limit the product offering, negatively impacting the customer experience and revenue. In addition, these agreements materially decrease the margin earned by concessionaires.

SVAGDIS: I have a 26-year-old daughter. She’s a millennial, she’s got a great new job and she’s traveling. I am a baby boomer. In just talking to my daughter and following her on social media, I know her experience and expectations of great restaurants are different from mine. One of the key things I think about is customization. We do a lot of pre-ordered items because we want speed, but we’re going to have to figure out how to customize and give [travelers] what they’re looking for, while at the same time doing it in a fast and efficient manner. The dwell times are continuing to dwindle down in this business. And then Gen Z is coming in and they’re going to act very differently. They’re getting older and they’re traveling, and we need to be ready for it.

LO: In recent years, there has been significant consolidation, with HMSHost buying back into retail with Stellar Partners and then acquiring Avila Retail and, most recently, Pacific Gateway Concessions; and also recently Paradies Lagardère buying HBF. What does the landscape look like if the large are getting larger and the companies in the middle are disappearing?

BENTON: I believe that the mid-sized companies get to a point where they either want to exit the business, or the small business ACDBEs hit the [program’s] threshold of sales and there is no real place to graduate to. I think we’ll continue to see those companies look for an exit strategy. I think there will always be new players coming in. That cycle will continue.

CASEY: We’re for sale—no secret there— and some firms are looking at us. I’m sure we all have a list of companies that we’re looking at and talking to. I think that it will continue. Like you said, there are new ACDBEs, there are companies being launched, and they get purchased by the bigger ones once they determine their exit strategy.

Lo: There are global companies on the retail side who want to enter the market, but face obstacles because of the dominance of Hudson and Paradies Lagardère. Are there opportunities?

Fordyce: There are always new companies that materialize then start to grow and eventually they become competitors. I don’t think there’s ever been an era where there has never been some fairly robust competition on both the food and beverage side as well as the retail side. I do believe there are always going to be start-up companies. Airports are always going to be looking for competition. They’re going to give small players opportunities.

Kelly: It’s a complex location to do business and that’s the barrier to entry. But as opportunities arise and people start seeing this compounded growth rate that we have here, people are going to start entering this market. Consolidation happens around driving logistics and cost savings and getting technology deployed more effectively. That’s just the normal course of business and we shouldn’t be alarmed by it.

Paradies: We’ve been part of the consolidation. From our company standpoint that’s not something we’re going to lose sleep over provided that we’re doing our job, which is innovating, evolving, changing, growing and doing things differently. That’s just part of the world that we live in which, to me, is energizing.

Lo: Rick, you’re the only one at this table that started from the beginning coming off the street and entering the airport. OTG wasn’t a company that had any prior airport experience.

Blatstein: We started in January 1996. We started as a transition operator at Philadelphia. We started with zero and we built it every year. We’re not an acquisitive company. We’re an organic growth company looking for really special locations where we can create a great experience. We’re not going to sell nor are we looking to acquire.

LO: What current external factors do you expect will be the biggest disruptors to the airport concessions business?

CASEY: Labor and living wages. There are markets on the West Coast that we are not going to go because it just doesn’t make sense for us. In a lot of our restaurants we have smart kiosks for ordering where we can potentially re-deploy labor. I was in Barcelona and Areas runs a Burger King where there are seven smart kiosks where you can walk up to get that order, or you can go over to an associate and get that order. So, the evolution of technology is going to help us get through some of the labor issues.

FORDYCE: I agree that wages are tremendous. It’s one of the biggest line item expenses on the [profit-and-loss sheet]. From my perspective, the overall health of the economy is one of the most crucial components, whether it’s fuel prices or other world events that impact travel in general.

KELLY: I see labor as a quality-quantity issue. I think technology isn’t about keeping our labor costs down. It’s about having a quality transaction and having the right number of people to do transactions. I think enabling technology isn’t about eliminating an employee. It’s about making them more efficient and effective so we can meet the demands of the traveling public. You have to invest in your associates and create that quality. Then how do you keep them? How do you create an atmosphere that people want to stay and work in the industry? Another external factor is the complexity of doing construction in an airport. As airports invest more and more money in infrastructure, there’s got to be a role that we play earlier on about how we are doing our tenant improvements so we can do them more effectively. I think that’s a real challenge. To have our capital dollars go in the right areas and us deploying capital in the right way is important for our health.

PARADIES: Not to be repetitive but I agree that it’s people and labor. We believe high touch will continue to be important. High tech will be important to help the high touch get better. Going forward there are going to be fewer touch points in airports with airlines so concessions can provide that high touch. Another big headwind is the pressure on airports to generate non-aeronautical income. I think airports need to be careful in the balance between
revenue and the customer experience. I think we all agree around this table about pouring rights, but it goes beyond pouring rights. What’s next that’s going to really limit the consumer’s choices? As an industry around this table, we need to do a better job of educating our airports on the pros and cons. On the living wage, there needs to be a partnership [between an airport and concessionaire], so when there are material changes in the marketplace that are different than when the agreement was written, then [the two sides can work together]. We all believe in the people and in the experience, but also we all have to get a return on investment and the airports do as well. There are a hundred cents on a dollar and if you pay $25 in California for labor and another $8 an hour for insurance something has to give. And traffic isn’t offsetting those material increases in costs.

BLATSTEIN: We enable [employees] and empower them with technology. Minimum wage at $15 an hour, $19 an hour in the Port Authority [of New York and New Jersey] and in California it’s $25 an hour or so. I’m a proponent of that. I hope there comes a day where we pay our people $30 an hour and up because then we’re going to continue to get better and better people. Our biggest and best secret weapon is our people, hands down.

BENTON: I think it’s more about the deployment of the capital. Something has to give. If I were ever back on the airport side, I would ask: why rip out a perfectly good store and force any concessionaire to gut it back to the wall, or in a food and beverage operation go to the back of the house and gut out a perfectly good kitchen? I don’t think that’s done on the street. Imagine if an airport can find a way to increase its non-aeronautical revenue by helping us redeploy that capital, not in design and construction cost but maybe as some kind of share with them. If we can find a way for the airports and their procurement models to take [capital investment] out of the scoring [we can] find a more efficient way to spend capital.

SVAGDIS: Wages and benefits continue to go up. The unemployment rate is fairly low in some markets we are working in and it’s hard for us to find cooks. In a couple markets we’re paying $20-$22 per hour plus really good benefits but they’re leaving us and going into the construction business. Another external issue is doing construction in the airports and finding tradesmen and subcontractors. There have been four to five instances over the last three to four years where all of our competitors are doing construction in the airport and to find contractors that meet expectations and timelines is very difficult. Outside of labor, the big challenge is pouring rights. It continues to erode our margin of profitability. The other is distribution, because those charges go to us. The airport uses a third party because they want to remove traffic from the tarmac. If you look at cost of labor going up and the fact that labor is hard to find, and you look at the distribution charges as well as the pouring rights, it’s becoming more and more difficult to drive profitability in the business.

LO: Keeping with labor and technology, there are apps that allow you to order ahead, there are the touch screen kiosks and food delivery services. Are we evolving customer service or are we eliminating it because the touch points are different?

FORDYCE: I think customer service to each individual is very different. Baby boomers are still a big portion of the traveling public, and millennials have become the largest portion. Incoming is Generation Z, which has very unique shopping habits and is more comfortable with different uses of technology. I think the key factor is to be able to offer a broad range of options to conduct the transaction. It could be a cashier-less transaction or a self-checkout or capabilities of using Apple Pay or Google Pay. Or it could be the simple everyday, one-on-one transaction with a person, which many of our customers still prefer today. On the convenience side, at least for Hudson, 30 percent of our transactions are done through cash.

KELLY: I think Gregg was talking about high touch. High touch can’t go away. We’re managing the middle. Technology is managing that TSA front end. Technology is managing the airline experience now. We need to manage the middle and provide that hospitality. There’s always going to be disruption, but we can’t let disruption lead the hospitality and lead the experience that we’re trying to deliver. It’s all about adoption on technology. There is so much being introduced on a daily or weekly basis and if it’s not being adopted then it’s not relevant.

PARADIES: Our challenge, and it’s the same for many around the table, is that we operate about 150 different dining and retail brands. The brand expectations are all very different. They’re evolving as well because of the challenges they have on the street. If your employees are happy, they can deliver great service and experience to all the different segments. If they’re not happy, they won’t. That’s the one thing that won’t change.

BENTON: The customer will drive what they want. There will always be new attempts, but sometimes you don’t chase every opportunity. I’m always encouraged, because I’ve been fortunate enough to work for larger companies, to feel real special about preserving it for the future. Technology is a part of it. You have to recognize these four generational groups that we’re trying to serve. We’re investing in technology, but that customer experience is keeping the right balance. It’s not all or nothing at any given time.

CASEY: We’re testing a lot of the things that you talked about – Grab, At Your Gate and other services. We think with artificial intelligence and the customer experience there needs to be a balance. We’ve taken part in a couple of things that the airports want but the customers don’t use. We need to find that right balance. But how do we deliver that personal experience while taking advantage of the [artificial intelligence] that’s out there?

SVAGDIS: We’re going to start seeing more millennials coming into our business and more Gen Zs, and they like technology more than the base clientele. We’re going to have to evolve. The most important thing is, how do you impact as little as possible the three-foot experience and still bring the technology? That’s going to be the real trick. I think it can erode the overall customer service experience. Whoever figures that out first is going to be the most successful with it. At SSP we’ve been very cautious about what we do with technology because we are very passionate about the three-foot experience.

Lo: Is it a matter of price point? Customers at a quick-serve venue might not have the same service expectation as they have at a sit-down or a fine-dining establishment, correct?

Svagdis: You make a very good point. A quick service restaurant is a standard menu, most people know what the items are. Our portfolio skews more towards the table service restaurant but we’re growing in the QSRs. [Technology] has its place and [quick serve] is a perfect place for it. I’m confident that it doesn’t impact the experience but instead enhances it. It creates a speed of service which is important to us and to the airport.

BLATSTEIN: I agree with everyone, other than one part. I think cash is trash and it should go away. Cashless transactions are the future. You can’t fly on an airplane and buy anything with cash. Everybody keeps bidding up the percentage rents – I’m seeing percentage rents now in the 20s again. Who’s making money on that? You can’t afford an investor paying 20 percent rent. You can’t afford staff paying 20 percent rent. You can’t deliver an experience paying 20 percent rent. I think there’s more to do and that’s to learn more about what our customers want and how they want it. With big data, which we apply now, we learn more about our customers. I grew up in the restaurant business. I thought I knew a lot about the restaurant business but when we deployed our iPads in our first restaurant I was concerned. Are they going to squat at the table because they have free internet? And how do we get the tables turned? Guess what? The table time was cut in half because they got what they want and how they want it. They spend more money because they order what they want.

Lo: Within your own organizations, what are you doing to elevate the next generation of executives and team members?

Paradies: Succession planning has become a religion within our company. As you grow your business, if you’re not ready for people to fill slots then you’re typically not successful because there is a learning curve. All of our leaders are measured—part of the evaluation is succession planning. From an industry standpoint it’s been interesting. I’ve been in the industry for over 30 years and to see the changes in leadership in airports as well as around the table here. Why? Because airports have become more complex, more sophisticated. In turn we’ve brought in leaders from outside of our industry, particularly in the non-business development side, who can bring in the best practices of Amazon, Disney, TJX, etc.

Blatstein: We have career pathing in our company. We work on succession planning for everybody and every part of the business constantly. Not only do we grow the leadership, but we bring in different views and opinions. The way we did things ten years ago is not the way we do things today and not the way we’re going to do things five years from now.

Benton: [HMSHost has] an entire presentation on the amount of investment that Steve [Johnson] and the team are making in people. When I look at our development team, I am conscious of gender and ethnic background of the professionals because those are the leaders in our airports. Those are the leaders in our society. I think the investment in our associates, the investment in generations, the investment in gender and the investment in ethnicity are all important. We shouldn’t be afraid to say, “I do see gender. I do see race. I’m okay with looking through those lenses.” I may not understand all of it myself but that’s why I need those people at the table. We have to be willing to open our eyes and recognize what we don’t know.

Casey: We’re in a little different position being ten years in the United States. We are spending more time on succession plans. We don’t want to have to go outside and hire somebody for one of those leadership jobs. But when you’re growing at our pace you don’t have people who are ready to take over a $100 million dollar business. It’s too big a growth and would be a fail for the person and it wouldn’t be fair to them. So, we’re working on mentoring programs with our senior leadership as well with people in the field.

Fordyce: Like our peers, Hudson Group has invested a tremendous amount of money in the past ten years in people development. Our company is about the people and the team that delivers day in and day out. We, as the executives, can sit here and take credit for it sometimes, but the truth is our success is built around the teams that are successfully working for us. We have a powerful succession planning program that’s been in place for many years. We’ve developed career paths similar to what Rick was describing. We invest in training for those individuals to get them to the next level. We have a tremendous track record of long-term employment with our company. Many of our executives have been around 15-20-25 years. Myself, I was the first general manager for Hudson Group back in 1988. I have the opportunity now to sit in the CEO seat. I’m the perfect example of what can be achieved through hard work but quality succession planning.

Kelly: We all chart our course for our future whether you buy your talent or you develop it. Diversity is relevant now and in the future. I’ll tell you what keeps me up at night, it’s succession planning on the airport side of things. I think we’re seeing a lot of turn on the airport side because of how bespoke they are and how provincially they’re running their operations. You build a business partnership and then we get some turn and people from the outside don’t understand it. The time it takes someone to get up to speed on the airport side can be painful on our part. I just don’t see the succession planning on their side. I know they’re talking about it.… If there is something that is going to prevent us from being successful in the future, it’s having a good team on both sides of the fence.

Svagdis: We have very robust processes that we put in place three years ago because of our growth. It’s web-based. We take every salaried employee within the organization as well as hourly supervisors. It’s key for us to have that database and the tools. Every year our executive team meets and has all the information [including annual reviews] for each person. We [assess a path and timeline]. We know when people are retiring, or if people aren’t going to make it with our company or when growth is coming. Then we look at gaps. That’s what’s critical to us.

LO: Looking into each of your crystal balls, where do you see this industry in five years?

KELLY: I think we’re going to hit the 4-5 percent range on growth. With that growth we’re going to see new entrants in the marketplace. I think 5G is going to be a real disrupting technology. Like the 4G before it that introduced Uber and Airbnb, 5G is going to bring us to a new level where technology in hand will be driving a lot of how we’ll be doing business and how the consumer drives their expectations with how we deliver our services. We’re going to
have to really listen to what the consumer is saying. I would throw a hope in here. I hope that we can operate as an industry where it’s more seamless and frictionless. The airlines own the relationships with the customers. The airport is really a transportation hub and all three of us are going to have to work together better if we’re going to deliver a better experience holistically. That’s what’s missing. We have a vendor/client relationship with the airport and we have no relationship other than just a transient relationship with our guests coming through.

PARADIES: Regarding the frictionless experience where everything is done on the phone, the future is almost now, from booking a ticket to checking your luggage and having them pick up your luggage from your house, all the way through your experience in the city, restaurants and everything else. [It will be] on one app versus a hundred different apps which we all have on our phones. Who’s going to lead that? I don’t know if some of our competitors are doing their own apps. We’ve looked at it and it’s almost a waste of time as far as resources. As airports privatize, business models are changing. We’d like to see airports go toward a profit sharing model. We have a few contracts with a profit-sharing model and it’s a true partnership. As we talk to our airport partners, we always say: I would take your deal, which is the rent we pay, and you get my bottom line every day. With more pressure on revenue and building the, “wow” in airports there has to be some type of partnership or co-investment piece.

BLATSTEIN: If you look at the quantum leaps that technology is taking every day and every hour and the advent of 5G, the customers are expecting a different experience. If you’re not there with that experience – or slightly ahead of it at times – the customer is going to be disappointed. I think everybody has to embrace the future dramatically. I think the airline’s brilliance and efficiencies are just going to drive the experience and bring more people in. The future is pretty amazing.

BENTON: A balanced approach is critical, [because] the experience is still food or retail. How we deliver it could become a different experience, but the end product is still a good meal that a consumer wants. We will try new things, but the consumer will always tell us, “I still want this.” They want a mix of iconic local brands, but also brands they recognize. They love proprietary, but when you look at the sales of those different concepts, they speak a pretty clear message that as the innovators are trying to speak for the consumer, the consumer still speaks with their pocketbook.

SVAGDIS: Are people going to be willing to order food without seeing it and not have that experience in taking a look at the menu and getting a sense of what the offering is? Are they willing to do that by phone? I think the answer is yes. Technology will continue to evolve and get more interactive with the consumers to
make them comfortable using it. We could see a lot fewer store fronts. It could be a locker with a kitchen behind it where food [is deposited]. I also think the expectation is going to get higher and higher. Everybody wants to know what’s in their food, how it’s made, where it’s produced. Sustainability is starting to pick up in our industry. We see
more of it in our RFPs.

CASEY: Our future generation, our future customers, are going to demand that we move toward a more sustainable environment. We recently announced that we’re moving to paper straws at triple the cost. Granted, it only went to .015 cents. We’ve heard it over and over that we have 100 pennies on the dollar so how do we get creative? The car rental agencies were brilliant when they came up with the concessions recovery fee. If we charged a concession recovery fee of18 percent that Avis does, we can come up street pricing pretty quickly. Pouring rights takes money out of all of our pockets. How do we together come up with a new way with driving up revenue that equals the playing field with the airports.

FORDYCE: Simply, five years from now this will remain a very robust industry. People love to travel. The year over year growth is huge. The technology is clearly going to change the experience in both the travel as well as how we manage our businesses, whether it’s changes in transactional capabilities or trends in the product, I still think five years from now we’ll look and say that this is a healthy industry and that travel is a way of life.

BLATSTEIN: Until Elon Musk discovers and creates a teleporter, I think we’re in great shape.