Enliven was recently invited to speak at the 2019 Passenger Terminal Conference, on the subject of pouring rights. The talk was co-presented by Tim Richardson, Founder and CEO of Enliven, and Jim Tyrrell, Chief Revenue Officer at Philadelphia International Airport.
In the talk, you will learn:
- What is a pouring rights agreement?
- How are pouring rights agreements structured for airports?
- What are the benefits of a pouring rights agreement?
- How has a pouring rights agreement worked for Philadelphia International Airport?
- Can a pouring rights agreement benefit all airport stakeholders (airport, passengers, and concessionaires)?
You can watch the presentation below:
Related Articles & Resources:
First, I want to say thank you. You have done a great job organizing this track and moderating these panels. I have learned a lot this week. I really appreciate this opportunity to speak with you all and talk about pouring rights at airports. So thanks for coming this morning.
So, pouring rights agreements. Many of you probably do not know what they are. They are not very common in airports at this stage so I am going to have a really basic description of pouring rights and then we can get into more detail in the Q & A if you want. Coke, Pepsi, Nestle and other global beverage companies really want direct relationships with airports. It is their fundamental business model to partner with premier properties around the world and so they want to partner with you. Oftentimes when we start talking to airport executives about the kinds of revenue that can be generated they are skeptical that that kind of money can really be generated. There is a lot of margin in sugar water and there is a lot of margin in this water, and so there is money to be had. Beverage sales always increase when you do a pouring rights agreement, which is sort of counter-intuitive. People think the opposite. People think if you go exclusive you might be limiting choice in some way. In fact you are expanding choice and in fact beverage sales usually go up. I have heard many times at conferences like this over the last three years that airports are focused on improving the passenger journey, the traveler journey, and one of the ways you can do that is to partner with one of the big beverage companies. They know a lot about anticipating and meeting consumer needs and expectations and creating really exciting brand experiences for your travelers on your campus.
So what are the key benefits of pouring rights? First and foremost we touched on growing non-aeronautical revenue without any new capital expenditure, no capital cost, or new operational expenses. It is rare that you can find opportunities like that. One of our clients told us that he is going to generate more revenue with this pouring rights agreement than anything else he could possibly do in his concessions program.
You will improve the traveler’s journey. Like I said Coke, Pepsi and Nestle and all the major beverage companies around the world have existing partnerships with other premier properties, with celebrities, with sports leagues, with sports teams. They are eager to leverage all those other assets and those other investments they have made with you at your place of business so you can have some really exciting synergies there that you can take advantage of.
Access to business insights and other resources. Again, these beverage companies are consumer product giants, they spend a lot of time, energy and money researching what consumers need and want. They are setting trends, they are establishing trends in consumer behavior. They know a lot about your customers and you can leverage their insights and their knowledge and match it up with your own and really better anticipate what consumers need and want when they are in your terminals.
Increased beverage sales and other benefits for the tenants. Pricing will go down for your operators, your tenants, especially the smaller, local, regional operators, the ACDBE tenants. If you think about it, many of you are trying to bring more local flavors, more local operators onto your campuses or your terminals. Those people do not have the clout or the business savvy or the volume to negotiate great pricing, great rebates, great merchandising support. You do. And so you can ensure that all your tenants get the lowest possible prices on their cost of goods when it comes to beverages. The larger global players, the Hosts and Hudsons of the world, of course have their own deals with Coke and Pepsi and they have great pricing already and so what we will do with them is we will at least match their current prices as part of the RFP process. I encourage anybody exploring a pouring rights agreement to make sure that in your RFP you tell the beverage companies that pricing needs to stay the same or go down for all the parties.
There are other social benefits of having a pouring rights agreement. Coke and Pepsi are global leaders in sustainability and recycling. That’s a common theme I hear among a bunch of airport executives. Everybody is thinking about those things. You can partner with Coke, Pepsi, Nestle and the other big beverage companies, leverage what they are doing and bring it to your campus. And then of course some people are concerned about the health impacts of full sugar soft drinks. So are the big beverage companies. That’s why all of their growth is in healthier-for-you products, waters, juices, teas. If you said to your beverage partners you want to de-emphasize full sugar soft drinks and emphasize healthier products, they will be right there with you. That’s what’s growing in their portfolio, and they would want to do that with you.
Pouring rights, like I said, are best practice in every other sector around the world. Any hotel you go to, this convention center obviously has a deal with Coke. If you walk downstairs you see the coke vending machines, you see all coke CSD (carbonated soft drink) and all the tenants downstairs. Every facility like this, every casino, every theme park has a deal and there are a lot of reasons why airports are late to the party, but there is no reason why it cannot happen on a greater scale in airports.
So just some concrete examples of what other airports around the world have done. These are US airports. I am from Nashville, TN. We’re based in Nashville, TN and so we know more about the US market. Dallas was the pioneer in these deals. Dallas started all this in airports in 1995. They did a deal with Pepsi, a 10-year deal in 1995. Very successful, they re-upped with Pepsi. They did a competitive RFP but they chose Pepsi again in 2005, another 10-year term, and then they just switched in 2016 to Coke. So literally in the span of several days all the Pepsi coolers and Pepsi products were gone and Coke products, coolers and fountain equipment were installed. People also are sometimes concerned about the operational challenges of switching or going exclusive. Coke, Pepsi, Nestle, and these big companies do this all the time and they are very practiced at it so the operational challenges you might imagine that come with it are really not that big. So anyway, Dallas did it. They did about 3.5 million a year in direct funding. There are a lot of other benefits. I am not talking about soft benefits here. This is all cash benefit. But Coke does stuff like built out children’s areas. When the Olympics were going on in Brazil they flew some of the US national team athletes through the Dallas airport and did special meet and greets with US athletes at the airport. Things like that are not included in that number. That is a cash number. Philadelphia international Airport’s Jim Tyrell is a great client. We have been working with Jim for about three years now and Jim chose Pepsi. We are agnostic when we work with clients. We are agnostic and you should not go into it with any preconceived notions about being in a certain market and having to partner with this beverage company or that beverage company. It really should be about the total package and the total program being offered. But Jim chose Pepsi at about 2 million a year on average. This first year, really, we are still implementing the first year. It is a lot more than that because there are some initial one-time conversion fees paid. But it is a good deal for Jim. Detroit did it after Dallas in 2009. They did Pepsi first, now they switched to Coke. And Indianapolis, a smaller airport with a smaller value deal. They have been with Coke since 2011.
So how does it work? If you have a pouring rights agreement you have a direct contract between your airport, your entity, and the beverage companies. I say one or more beverage companies because we are learning in the EU and around the world as we work that we are probably going to have to do – or the airport is going to have to do – two or three pouring rights agreements breaking them up by categories. So for the EU we think in a lot of markets it is going to be a water RFP and a water partner. Water is obviously huge, sparkling water, still water, all different kinds of water. There are major water companies in the EU that want to aggressively compete for your business. There would be a juice RFP, probably, and then there will be everything else which is carbonated soft drinks, teas, energy drinks, things like that. So you have a direct relationship with the beverage company. The typical pouring rights agreement, as I said, the beverage companies provide funding, they provide pricing, price increase caps every year on your tenants so they cannot gouge your tenants.
I want to make this point now. Sometimes I forget to make this point. Some people think that because all the tenants and concessionaires have their own relationships we are shifting money away from tenants and concessionaires to the airport. That is not the case. The pie gets bigger. The tenants are kept whole and the funding pie gets bigger when you have a direct relationship and there are a lot of reason for that we could go into. The pouring rights agreement typically covers all non-alcoholic beverages and non-brewed beverages. Our firm are always asked to do a beer deal or a whisky deal but we do not do those deals. You can do those deals. You can find help to do those deals or you can do them on your own but pouring rights agreements really are focused on non-alcoholic. And non-brewed means no coffee, no hot coffee, no hot tea and also no dairy. Those are separate categories of beverages that are specialized and usually are not part of pouring rights agreements. If you go down this path you should have a public RFP process, of course. We encourage a lot of transparency, of course, just like you would procure any other partner. Sometimes people are concerned that the beverage companies are going to want to overwhelm or overtake the campus and put logos everywhere. I just want to emphasize that you are in control. it is your property. You control how much marketing happens, how much branding happens, and that is a collaborative decision made between the airport and the beverage companies.
A lot of people feel, and we get this question of the time, “Wait a minute, McDonald’s is on our campus, or Burger King is on our campus, and we know they have their own deal.” People know that all the restaurants have their own deals. And so they say, “We cannot tell McDonald’s what to serve. We do not want to get into their business and we do not want to tell them what to serve.” Well in fact, I should say we have a restaurant practice. We work for global restaurant companies around the world. All the beverage companies and all the concessionaires have or should have in their contract with a beverage company what is called a host property exception rule, which simply means that if you are working at a premier property, a university, a convention center, an airport, and that premier property has its own pouring rights agreement, then you are free to serve whatever that host property wants you to sell or wants you to serve. A concrete example here. This is the Detroit airport, this is the McDonald’s in the Detroit airport and when Detroit did a deal with Pepsi the McDonald’s franchisee said, “We are partnered with Coke.” The airport said, “You are on my property and I just did a deal with Pepsi so you need to serve Pepsi.” And so they switched to Pepsi. It is interesting that McDonald’s in the Detroit airport is the highest grossing McDonald’s in the whole state of Michigan. So they did not want to leave; they wanted to stay and they were happy to serve Pepsi.
This is another point I want to make. We are all drinking less carbonated soft drinks. We are all drinking more water, more juice, more tea. Soda typically represents only about 15 to 20% of the volume going through any airport and it is declining every year. When we think about the beverage wars it is not the cola wars anymore. It is the beverage wars. Both Coke and Pepsi have huge product portfolios and the growth for them is in healthier-for-you products. That is an important point to make.
This last point, the bold statement at the bottom, is another counter-intuitive thing about beverage deals or pouring rights agreements. Actually, choice expands greatly when you have a pouring rights agreement. Let me unpack that a little bit. Right now you go to any airport, I take pictures now of all these coolers at airports, and you look at them and most of them have one or two rows of carbonated soft drinks, energy drinks and things like that, and then about six rows of water. There is really limited choice right now as far as categories of product. When you do a pouring rights agreement with a beverage company they very much want to put a lot of their product portfolio on those shelves. They want the traveling public to see they have kombucha, they have green tea, they have fill-in-the-blank, whatever exciting new innovative product that is taking over the beverage industry. They want that on the shelf. They have that product. They want it on the shelf. Sometimes operators, especially smaller tenants, are not thinking about exactly what the consumer wants and needs. So you have a buyer for a small mom and pops shop and they are probably thinking they don’t like kombucha so they are not going to put kombucha on their shelf because no one is going to buy that, when in fact your traveling public wants kombucha. So just a counter-intuitive point but it is something we hear all the time and I wanted to emphasize that.
These are just some summaries. Dallas has earned over 50 million since they started doing it in 1995. Detroit has earned over 11 million. These deals are getting richer so on a per passenger basis we are seeing more recent pouring rights agreements, that we have done and other people have done, are richer on a per passenger basis. The beverage companies value your property more than they ever have in the past. So it is a good time to think about this.
As I mentioned earlier, it is not just about the money. It is about creating engaging airport spaces. Lipton is a Pepsi brand. Anything you see in a bottle or a can by Lipton is typically distributed by Pepsi around the world. When you partner with Pepsi they might want to do sort of an immersive experience at your airport where they will show you how they source all the tea, where the tea comes from, let you taste different flavors, brands, and styles of tea. Those experiential opportunities are available when you partner with a beverage company.
If you are on the fence about whether or not you should do this you should know that the beverage companies want to do it right now. This last bullet I want to emphasize here. If you don’t want to do a beverage pouring rights agreement, if you think it is not right for your facility, that is fine. But I think you should at a minimum include in any new lease, any new contract you do, any new RFP you issue, you should insert language that says you specifically reserve the right to do it. That way five years down the road – I think more and more airports are going to start doing this – when you are ready to do it there will be no question. Every tenant, every concessionaire will know that has always been in your thinking and a possibility for you to execute on.
And that is it. I am going to stop there. I am going to introduce Jim Tyrell. Jim is the Chief Revenue Officer at the airport in Philadelphia and Jim has some practical experience with all this. Jim, take it away.
Thank you, Tim. Good morning everybody and thanks for coming here so early on a Thursday morning.
My name is Jim Tyrrell. I am the Chief Revenue Officer at Philadelphia International Airport and my focus is going to be telling you why Philadelphia chose to do an exclusive pouring rights deal. And it really was not an easy decision for us. But for you folks who are working in airports right now you know that the number one priority for airports is generating non-airline revenue because that is what makes the airlines want to serve your airport.
We were presented with the opportunity to consider a pouring rights agreement back at the end of 2016 and one of the first things we did when we were evaluating that decision was to begin putting pouring rights language in all of our concession leases. At Philadelphia the airport has about 180 different concession locations operated by about 100 companies. As you might well imagine in any given year we will turn over a dozen or so leases due to term expiration. So we took the opportunity to begin putting the option for the airport in these subleases at just about the time at the end 2016 when we were presented with the opportunity.
We went through a few months, several months actually, doing our due diligence as an airport to see what the impact of this would be not only on our revenue, because that is kind of a no brainer, but on other kind of unintended consequences. At the end of our due diligence the airport developed three primary goals that we decided if we could achieve those goals then we would definitely go forward with a pouring rights agreement. And the goals were equally important for us. Not one was more important than the other. They were to increase and diversify the airport’s non-airline revenue.
The second goal, again equally as important and is becoming increasingly important to airports around the world, was to enhance our customer experience. People have a choice, especially in this day and age when they are booking travel and you have so much data at your fingerprints, you have a choice to fly out of or through any airport you want. Especially in Philadelphia’s case, we are a large hub airport but we also have a predominant airline. It is American Airlines. And there are three or four different American Airlines hubs situated on the East Coast that you could choose to fly over or through anywhere you are going around the world. You could choose Philadelphia, Charlotte, Dallas, Miami, depending on your destination and a lot of people make choices depending on the airport and the experiences they have had at those airports in the past. I can tell you I hate to fly through Chicago any time during the months between October and March because typically you will hit a weather condition. That is not reality but it is my perception and as a traveler I make my travel decisions based on those perceptions. So, again, one of the goals we had was to enhance our customer experience. That is critical to the airport.
The third and certainly not least of our goals was to strengthen the financial position of our tenants, specifically our concession tenants. It is not easy to be a concession operator in Philadelphia. You are faced with labor harmony requirements, paying a living wage, not that those are bad things. It is just challenges for small, middle and even large companies. But also we have street pricing. So in order to generate a profit at the airport you really have to be a good operator and those are tough things to operate under. We basically told our consultant Enliven that we would not enter into a deal that is funded on the backs of our concessionaires. The money that the airport gets related to this agreement would have to be from another source. It would not be from our tenants.
In fact, we were able to generate huge savings in terms of cost of goods for all of our tenants. It was important for Philadelphia because we are primarily made up of small and medium sized tenants. Of the 180 locations only a handful, we try and divide equally between the national retailers and the small local operators. The national retailers are very important to us. In the US there are four major retail companies who operate at airports and we just happened to have all four in our airport. You have Hudson, you have Paradies Lagardere, you have Stellar News and you have HMSHost. It was important for us to make sure we were not going to alienate and/or lose those retail concessionaires who operate at our airports.
The first thing we did when we were considering going to an exclusive pouring rights agreement was to meet with these four companies individually and lay out our plans for what we were going to do because we actually pride ourselves in being very transparent with all of our stakeholders. It was an interesting response we got. One of the companies said, “It’s probably not going to be a problem. We will negotiate it within and we will be able to work it out.” One of the companies said, “It depends on which companies you pick as to whether or not we are going to be happy or not.” One of the companies was in transition, they were in the process of being acquired, they were also in the process of entering into its own agreement with us and they said “We are not really sure how we feel about this.” One of the companies actually drew a line in the sand and said, “If you do this we will not operate any longer at your airport.”
To make a long story short, we went through the process, we were able to achieve our three goals, we did enter into an exclusive pouring rights agreement with Pepsi. It just so happens, you will remember my number two retailer who said if I picked the right company it wouldn’t be a problem, we picked the wrong company. But in the end it turned out not to be a problem. That company was able to negotiate an additional agreement with the airport. We did move forward with a new deal with that company
In closing the airport achieved all its goals, we did generate sufficient non-airline revenue to make this a very positive decision on our part. As a matter of fact we are still in our first year of the agreement and we have generated over 2.5 million dollars which is well in excess of what we anticipated we would generate in revenue as well as an additional allocation of money that was part of the deal that will be used as an enhancement to our customer experience through different experiential opportunities.
For those of you who are Eagles fans and will be coming around Philadelphia on April 15th, you can actually visit with Zach Ertz, who is a tight end of the Philadelphia Eagles, who will be coming to the airport to meet and greet a lot of passengers as they come through Philadelphia. This is just one typical opportunity that Pepsi has presented us.
A not real sexy opportunity that Pepsi is helping us out with today is also is to address our sustainability issue. Pepsi has come to the airport. They have leveraged their resources because they are a global operator and they have opportunities that the airport is not necessarily privileged to participate in. But they are helping us again to achieve our goals in terms of sustainability. While Tim said pouring rights may or may not be right for your airport, I think it is long overdue in the airport environment, especially with the pressure on airport operators to generate non-airline revenue and, more importantly, diversify those revenue streams. So that is why Philadelphia chose to do a pouring rights agreement. Thank you and we will be happy to answer any questions.
Q & A
Q: [inaudible…] Can I just check with you with regards to this pouring rights agreement, have you considered whether it might be anti-competitive, and if so, how did you address it?
A: Great questions. In America there is no problem at all doing these deals. We have learned around the world there are anti-competition concerns and questions. We have spent a lot of time and money with lawyers in the last year and a half, especially in the EU, trying to sort that out. We have been advised that it is not anti-competitive in the EU. We have also spent some time and money in Asia addressing some of the same concerns and we have been told in there it is not a concern. But I would say it is something you need to think long and hard about, you need to understand, and you need to have either your own in-house counsel, your consultant or your outside counsel really look at it and think about it from your market’s perspective. In the EU, we are moving forward with some EU business, and it has kind of solved itself. We realized in the EU that you probably need to do multiple pouring rights agreements and that water is such a big category in the EU. Once you introduce that concept of doing multiple pouring rights agreements the anti-competition concerns go away. But it is a case by case issue.
Q: [inaudible question pertaining to sustainability]
A: Yes, it is a huge issue. I will confess if you look in my briefcase I have got a little refillable water bottle in my briefcase. And so it is a big issue. I think every airport needs to think about it and it needs to be a part of your planning process and your RFP. I will say that both James Quincey, the Coke CEO, and Ray Laguarta, the new Pepsi CEO, spoke at Davos this year and that was the core focus of their remarks. It was water conservation and the plastic problem and what steps they are taking as companies to address it proactively. So it is an issue. I think your pouring rights agreement can be a part of the solution and not perpetuating a problem.