INDIA. In the latest of a new series about travel retail in India, #Miles2Go Consulting Services founder Shriram Sanjeevi comments on Airport Authority of India’s recent tender for a master retail concessionaire at Chennai International Airport.
Airports Authority of India (AAI)-run Chennai Airport released a Request for Proposals (RFP) on 28 March for a master concessionaire for over 1,000sq m of retail space (as reported). This is the first lease of its kind that government-controlled AAI has attempted. Previously, AAI has awarded individual contracts and often for very small areas such as 20sq m. This move therefore is a step forward in terms of improving the commercial opportunities at AAI-run airports – notably at Chennai, which is among the top four airports in India by passenger numbers (18.3 million in 2016/17).
Ever since airport privatisation began in 2001 in India, it has been fought with stiff resistance from AAI employees fearful of losing their jobs and livelihood. The first private airports in India were set up in 2005 at Delhi and Mumbai (brownfield airports) followed by greenfield Airports at Bangalore and Hyderabad.
Contrary to popular belief at the time that private airports would charge exorbitant prices to airlines and passengers, we now have world-class airports in India at these four locations and the employment opportunities have more than trebled. That is especially the case in the commercial areas with more retail shops, F&B outlets and lounges. Most of these operate for over 18 hours a day, providing twice the employment as previously as well as increased salaries and perks.
Quality has improved too. Travel Food & Services (TFS) for example won various concessions for F&B at AAI-run airports over the past few years and is doing exceedingly well, understanding passenger preferences and offering them their needs and requirements. This has been much appreciated by most travellers, passengers and those associated with aviation in India.
The move by Chennai Airport for a Retail Master Concessionaire was met with surprise by the retail community. However, the number of organised retailers (or even consortiums) who have shown interest seems low. None of the major retailers I spoke to have decided to participate in the RFP. They have cited the following reasons:
- The total area is about 1,000sq m, which is spread across Domestic and International Departures and Arrivals. Retailers do not know really where the outlets will be located and what kind of returns they can expect.
- The New Integrated Terminal connecting Domestic and International Terminals is under construction and there is a lot of confusion over its future. Questions include when it will open and what happens to the existing retailers. Food retailers can move to any location and still draw attention and customers, but it is more difficult for retail.
- The asking rate for rental seems high. The Minimum Monthly Guarantee has been set at Rs.1,200 per sq ft per month which is astronomically high. Comparatively, high streets in central areas of Chennai charge between Rs.100 and Rs. 150 per sq ft per month as rent, while top-end malls like Express Avenue or Phoenix Market City charge between Rs. 250 to Rs. 400 per sq ft. And these attract a lot more serious and potential customers than Chennai Airport.
- The revenue share is pegged at 20% on sales which is practically impossible for product retailers since most of them operate at 30-35% gross margin on sales. With operating costs hovering at 12-15%, there would be practically nothing left over for the retailers after paying the 20% revenue share (even assuming they cover the fixed MMG per month.)
- Earnest money deposit of Rs. 42 lakhs and the surrounding clauses.
On 27 April, which was the last date for submitting bids, AAI extended the tender deadline by a week to soliciting more retail interest. However, I am unsure if this is going to work. An AAI spokesperson confirmed that there has been interest from potential bidders for this concession, though there is not much clarity about whether they all have a sound retail background. Some may qualify on technical grounds since many potential parties have been operating various airport concessions across India for a long time. Whether they are the right fit for Chennai is different.
So how might things span out? We will wait and watch with interest. I flew on Friday morning from Chennai (to Mumbai) and the retail areas are far from interesting or welcoming. From the location of the outlets to the concepts, I remarked very little interest from passengers to even enter the stores, which in my view look tired and boring.
The move by AAI to provide a master concession is a great step in Indian aviation, especially compared to the days when government-owned ITDC ran tiny shops, restaurants and tea shops back in the 1980s and 1990s. But the suspense over contract awards makes retailers wary of entering in to long-term arrangements at the airports. Also the uncertainty in aviation policies make it extremely difficult for organised retailers to take the plunge in the travel retail business. It is notable that beyond Bangalore and Hyderabad Airports, Indian retail giant Shoppers Stop doesn’t operate such large spaces in the airport market.
The retail penetration among passengers continues to remain at low single digits, thanks partly to less than interesting concepts introduced by concessionaires. The candidate is often chosen on a “H1” basis (basically the highest bidder) regardless of their other qualifications or how exciting the other candidates’ concepts may be.
However, I am not writing off the efforts of AAI already. They are moving in the right direction and the problems that exist are systemic and take time to solve. Now more collaboration is required between retailers and AAI. Beyond their commercial interests, a lot more trust is required by both parties in the primary interest of passengers who should ultimately become consumers.
I hope that the AAI organises workshops for retailers keen on active participation to showcase the modern changes that are coming and that they outline how and why retailers need to support them.
As a Retail Consultant, I encourage such a meeting of minds. And I sincerely hope this happens sooner than later. Let’s hope for the best.
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