Nashville airport plans major restaurant, retail overhaul

Nate Rau | The Tennessean

Nashville International Airport is planning to overhaul its concessions in a move that could mean the exit of popular local businesses such as Noshville deli and Parnassus Books.

But the very presence of those local restaurants and shops, including Swett's, Tootsie's Orchid Lounge, Blue Coast Burrito and Whitt's Barbecue, is a point of contention. Airport officials argue that those restaurants are operating at Nashville International Airport in name only.

The local businesses sign licensing deals with large concessions corporations and then partner to cultivate the decor and, in the case of restaurants, food menu.

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Top officials, led by new CEO Doug Kreulen, are proposing a switch to a "developer model," which would lead to hiring a single company to operate the airport's concessions and then subcontract with other businesses to run their own stores, much like the way a shopping mall is run. If a local business wants to set up shop in the airport under the new model, it would be responsible for the build-out and hiring of employees and then share a portion of its revenue with the developer.

The Airport Authority, which runs the airport, has already closed a request for proposal for the developer contract. Only two companies responded. The board of directors, which last month hired a new consultant to examine the concessions situation, is scheduled to discuss the RFP at its meeting Wednesday.

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But any change to the concessions won't come easily. Prominent business owners, the leading concessions companies and their powerful city hall lobbyists have made their opposition clear.

At stake, stakeholders say, are the vibe, food offerings and quality of customer service at the airport, along with tens of millions of dollars annually.

"Unfortunately we do not have any interest in building and managing an airport store on our own," Parnassus Books co-owner Karen Hayes wrote June 8 in a letter to Mayor David Briley and his top economic adviser Matt Wiltshire, who serves on the airport's board of directors. "Frankly the logistics of dealing with airport security clearances alone is off-putting to us. I can’t imagine we are not the only local business that feels this way.

"We know that our customers love seeing our branded store in their airport, and I personally love seeing Nashville brands in general represented in the airport."

Nashville airport concessions receive low marks from travelers

Because the Nashville airport is the fastest growing in the country, setting a new record for total travelers last year with 14.1 million, it's not surprising that the concessions business is humming along. Concessions generated $84.2 million in total revenue last year, and the Airport Authority earned $11.56 million of that.

The current contract, which expires early next year, is divided among the largest concessions giants in the U.S. — HMS Host, Delaware North and Hudson.

But despite the large revenue numbers, airport officials say the quality of the service is lacking. The most recent traveler survey shows that 94 percent of all passengers surveyed reported they were satisfied or very satisfied with the overall experience at Nashville's airport.

However, by comparison, 72 percent of passengers surveyed reported they were satisfied or very satisfied with the food service and 70 percent said they were satisfied or very satisfied with the shopping experience.

Kreulen said the airport's upcoming renovation project makes it essential that concession revenue increase. He pointed to the Atlanta Falcons' decision to switch to a similar developer model and the resulting 50 percent decrease in food and alcohol costs as proof that the new model will work. Revenue rose 16 percent at Falcons home games.

"If you've been operating under a licensing deal for 10 or 15 years and you're about to lose your mailbox money, I'm sure this would be upsetting," Kreulen said, referring to the regular licensing payments the local businesses receive. "But I have to run the airport like a business, and we're the first thing people see when they arrive and the last thing they see when they leave. We need to improve."

Additionally, Doug Sloan, the veteran Metro official who was hired late last year as the airport's chief legal counsel after serving for several years as the executive director of the planning department, said the existing concessions contracting system has been loose and informal.

The consensus among airport officials is that the concessions program needs to be better run and make more money. The airport provided a list of about 40 local businesses, including Loveless Cafe, Prince's Hot Chicken, Pinewood Social and M.L. Rose, that have expressed an interest in working with whichever developer wins the contract.

"We received from the board direction to make the airport more like Nashville and get local businesses in the airport, get minority-owned business in the airport, get women-owned businesses in the airport and to try to increase revenues over what they were," Sloan said. "The board had concern under the current operations the way concessions were being run here that we weren't inviting in enough local businesses.

"And a lot felt like it was already pre-decided who would be in the airport and who wouldn't be before the RFPs would go out on the street. So those are the different issues they wanted us to resolve."

In response to those concerns, the airport management researched how airports across the globe conduct concessions programs, Sloan said. As part of that research, officials toured the Baltimore airport and interviewed executives there, and then received a tour when they flew out of Reagan National Airport in Washington, D.C.

Both of those airports use the developer model in which a single company is hired and subcontracts with partners to run their own shops. The developer guarantees an annual fee for the airport and assumes the risk of generating enough revenue to cover those fees. For Nashville, the minimum annual fee would be equal to about $11 million.

Sloan said their research showed a higher percentage of local, minority-owned and female-owned businesses in those developer model airports.

"The developer model was producing exponentially higher numbers on those businesses participating in the concessions program," Sloan said. "And the way they were achieving that is by having local businesses come in and operate within the airport."

Airport officials hired a consultant, ICF, and law firm, Kaplan, Kirsch & Rockwell, specializing in such concessions deals to provide guidance during the contracting process. The city's RFP was modeled after the one issued in Baltimore.

A dispute over models emerges as businesses oppose change

Under the current model, major concession companies are responsible for running the airport's concession operations. It's common for those companies to sign a licensing deal with a popular local restaurant or retail shop.

The result is an airport that features Nashville businesses. But those local Nashville businesses aren't hiring the staff, cooking the food or running the businesses. Instead, they sign licensing deals that entitle them to a portion of revenue — about 4 percent, according to multiple sources.

Tom Loventhal, the owner of Noshville, says the current arrangement is working well since he signed a deal with HMS Host for an airport Noshville nine years ago. Loventhal said that in addition to licensing his business used at the airport, he worked with HMS Host to design and curate the feel of the restaurant.

Loventhal said that every 12 or 18 months his staff trains the cooks at the airport location and he is consulted on the overall menu and recipes. The airport Noshville features a smaller menu that his Green Hills location, Loventhal said.

The problem with the proposed developer model, Loventhal says, is that it is cost prohibitive for a small business. The build-out would be especially expensive, in the range of about $1 million, Loventhal estimated.

But there would be added costs since an airport location would need to be open 365 days per year for extended hours compared to his Green Hills store. There also would be background checks, drug tests, parking and other logistical complications that would make an operation at the airport more expensive, Loventhal said.

Loventhal said his current labor costs range between 30 and 33 percent annually. He estimates those costs would be closer to 40 percent before the extra administrative expenses associated with the background checks are factored in.

"I don't think the developer model is conducive to a small business like me," Loventhal said, adding that he feels the bid was written to cater to Fraport, the German firm that was one of two companies that applied for the contract. "I can't remodel at (the expense of) $800 or $600 per square foot. They're asking me to pay for it. They're also asking me to manage it, hire and fire and manage it. I don't know how to manage an airport location."

Critics say the developer model leads to national chains like McDonald's, Starbucks and Chili's running restaurants.

Sloan admitted that was a possibility under the developer model. But he countered that the airport needs a mix of national chains and local businesses.

"And if it says Noshville on the outside, or it says Whitt's or Swett's on the outside, then it needs to be prepared just like the food is at Noshville in Green Hills," Sloan said.

Kreulen said airport engineers have estimated the build-out costs would be $300 to $400 per square foot, much less than Loventhal's estimate. Additionally, the airport required that the winning firm commit spend $13 million in capital upgrades for the existing terminals at BNA.

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Critics say the airport should have written its bid more broadly to solicit proposals that fit the developer model and the concessionaire model currently in place.

Under the current bid, which closed earlier this month, any company contracting with the lead developer cannot earn more than 15 percent of the total concession revenue. That requirement has especially irked the leading companies in the field: HMS Host, Delaware North, Hudson Group and SSP America.

"Operating in airports is very expensive," Kent Vanden Oever, HMS Host's vice president for business development, said in an opposition letter to the airport. "Market rents can be more easily achieved if prime contractors have the scale needed to leverage overhead.

"Prime contractors have the skill and experience to sublease and manage subtenants, so the use of primes would still allow for competition and enhanced local, (minority and women-owned businesses)."

The result is an honest disagreement between the new airport leadership and some of the city's most influential lobbyists and most popular local businesses. James Weaver, who represents more companies than any other city lobbyist, works for Hudson Group. Alexia Poe, a former top adviser to Gov. Bill Haslam, represents HMS Host. Another top lobbyist, Dave Cooley, represents SSP America.

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The concessions dispute comes among a time of great change at the airport.

The airport is in the middle of massive growth and some behind-the-scenes turmoil. The facility is undergoing a $1.2 billion expansion and renovation.

And former CEO Rob Wigington is suing the Airport Authority for employment discrimination, saying he was pushed out after he revealed he was ill. The airport says he was pushed out for failing to manage the organization properly and making poor financial decisions.

Kreulen was hired late last year, and new deputies, including Sloan, were brought on.

Reach Nate Rau at nrau@tennessean.com or 615-259-8094 and on Twitter @tnnaterau.