Fighting for the Lucrative Duty Free Franchises

Does the Israel Airports Authority (IAA) put the interests of the consumers or the duty-free franchisees first? In theory, no one is happier than the Israeli traveler as he loads his shopping cart with duty-free products. A satisfaction survey conducted for the IAA by the Geocartography Institute found that consumers gave the duty-free stores high marks, and that the average purchase per traveler - $90 - is among the highest in the world.

Nevertheless, on the backdrop of the highly publicized struggles between Sakal and James Richardson for the franchises to operate the cosmetics and electronics stores in the new Ben-Gurion 2000 airport terminal, questions have been raised as to whether the IAA is looking out for its own interests and those of the franchisees rather than promoting what is best for the travelers.

Today, prices at the duty-free outlets are about 30 percent lower than in stores in Israel. Can even lower prices be guaranteed by selling two franchises - for example, for the operation of cosmetics and electronics stores - instead of just one? This question was debated Tuesday by the subcommittee of the Knesset Economics Committee, headed by Shalom Simhon, MK (Labor). The meeting was attended by representatives of the IAA and Antitrust Commissioner Dror Strum.

The big tenders have already been completed - the new terminal is due to open in June 2004 - and the results were impressive: James Richardson won the cosmetics tender, for which it will pay $88 million annually for the 10-year duration of the concession (the minimum demanded for the concession was $68 million). The Sakal Group won the electronics tender, after offering to pay the IAA $11.8 million per year for the concession. Richardson also won the sportswear concession, with an offer of $6.3 million per year.

Sources at Richardson and Sakal say that the prices they charge are particularly high in comparison to other countries around the world. Still, considering the fact that duty-free sales in 2003 totaled some $310 million, and the commercial space at Ben-Gurion 2000 is huge (the cosmetics store, for example, will be three times the size of the current one), the enormous franchising fees are understandable.

Simhon says that the committee he heads began to examine the issue of the commercial spaces at the new terminal due to the delays in the opening of the facility. Another reason for the committee's interest was a statement by Strum that there is no competition between the duty-free franchisees.

"Thus the question arose as to whether Israeli consumers are getting the best prices. The IAA's goal is apparently to maximize its own earnings, and the franchisees are the ones who profit from this," Simhon said.

To placate the committee, the IAA brought in Frank Gray, the CEO of the CPI consulting firm, which specializes in planning trade policy at airports around the world. Gray, who has been a consultant for the Ben-Gurion 2000 project since 1995, is familiar with many terminals worldwide, and says that in many of them, a single franchisee operates most of the stores at the airport.

At London's Heathrow airport and Schiphol airport in Amsterdam, there is a different franchisee for each store; but Gray says there is no point in having two competing duty-free stores. As for the prices at duty-free stores in Israel, which are run by individual franchisees, Gray says that prices here are 25-30 percent lower than at similar stores in Europe.

Gray's role in the Ben-Gurion 2000 project is to ensure that the mix of stores will increase revenues from duty-free sales. He notes that the new mix at the Ben-Gurion 2000 terminal puts more emphasis on food solutions, and that the new facility includes 24 stores, as opposed to 10 in the existing terminal.

Gray figures that the increase in the size of the duty-free shopping area and an improvement in the mix of stores, which include fashions, toys and music, will lead to a 15-20 percent increase in duty-free shopping during the terminal's first full year of operation - even if there is no increase in passenger traffic (3.4 million in 2003).

"In well-built airports such as Schiphol and Heathrow," Gray explains, "people make sure to spend more time at the airport. Even today, Israelis devote a lot of time to duty-free shopping; but I think they will spend even more time at the new terminal, especially if the food services are improved."

At present, most of the shopping at Ben-Gurion International Airport is done by Israelis. Gray says that the goal of the new mix is to increase purchases by non-Israelis, who constitute 25-35 percent of passengers, according to the IAA's data.

Yoram Shapira, who is in charge of commerce, properties and business development at the IAA, says the airports are a big revenue generator. "Everyone wants a share of this," he says. "Our job is to maintain the balance between the travelers' needs and the economic strength of the companies operating in the airport, and of the IAA itself. Sometimes, someone gets hurt; and since we are a government body, the injured party can petition the court and find out if we have behaved reasonably."

Shapira adds that even if there were two franchisees for every type of store, the prices would be no lower. Stores today are larger and have to stock a wide variety of products - even ones that are less profitable. The customer's shopping time is limited, so a large staff of salespeople is required. This means that operating costs are high, while the profits on all the products are not.

Shapira figures that if there were a number of franchisees for each type of store, the sizes of the stores would be smaller and each store would stock fewer products, focusing on the more profitable ones. The higher operating costs of the smaller stores would also be passed on, at least partially, to the consumer.

At the end of the Knesset subcommittee meeting, Strum said that the presentations at the meeting showed that the IAA's working assumption is that it is better to have just one franchisee for each category because the IAA's goal is to maximize its revenues from concessions.

"It is clear," said Strum, "that the IAA prefers one franchisee; at the same time, however, it is also clear that this is not good for the consumer."

Strum added that there was no general survey that proved that one franchisee per category was more efficient. He noted, however, that the Antitrust Authority had not read all the material that had been submitted to it on Monday.

The subcommittee listened to both sides and decided to postpone the debate until April. Scheduling the debate so close to the planned opening of the new terminal will make it very difficult to implement any changes the subcommittee may decide are required.

"The subcommittee hopes that by the next meeting, the [antitrust] commissioner will have prepared a report," said Simhon, adding that there is a disagreement between the IAA and the commissioner regarding his jurisdiction over the IAA, since it is a government authority.

"If the commissioner concludes that the IAA's decision is not good for the consumer, his opinion will be difficult to ignore," Simhon concluded.