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Hilary Kramer
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Hilary Kramer is the editor in chief of the subscription newsletters: Game Changers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return Portfolio and Inner Circle. For more than a decade, Hilary was the CIO of a $5 billion global private equity fund. She has an MBA from the... More
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  • The Future of Airport Dining – A New, Tasty, Profitable Reality at the Airport 0 comments
    Jun 24, 2011 10:46 AM | about stocks: WEN, BAGL, BWLD, PEET

    If you haven’t yet noticed, there’s been a quiet renaissance going on at airport concourses worldwide. More and more, airports across the globe – particularly big hubs – are beginning to offer increasingly varied (and much higher quality) dining options – a nice-looking Italian bistro, for example, or a funky Cuban joint; a new restaurant started by a celebrity chef, or a local favorite that opened up a new location at the airport.

    The bottom line is that air travelers are seeing vastly improved dining choices, with increased and better-quality selections from years past.

    What’s driving these upgrades? Local airport authorities are responding to community and customer demands to improve food services and the terminal experience.  But a few global companies are really behind these changes.  Their mandate is to essentially transform what in years past has been an unappealing task: delivering quick, tasty meals to customers while improving on delivery, quality, and overall experience (cost-effectively for the traveler and profitably for the airport).

    Two non-U.S. companies, HMS Host International (owned by an Italian parent Autogrill S.p.A) and SSP America (a regional operating unit of England-based global food service provider SSP Group Ltd.) are the biggest players in the category.   Both have established relationships and won contracts from airport authorities and commissions worldwide to bring travelers better-quality meal options.

    For example, SSP America operates food courts and concession facilities at more than 40 airports in the U.S., Canada and the Caribbean, including at Boston’s Logan Airport, Orlando, JFK, Dallas-Ft. Worth and LAX. Some of SSP’s establishments operate under national chain brands licensed from companies like The Palm Restaurant, Wendy’s (Wendy’s/Arby’s Group, Inc.: WEN), Buffalo Wild Wings (BWLD), Peet’s Coffee (Peet’s Coffee & Tea: PEET) and Einstein Bagels (Einstein Noah Restaurant Group Inc.: BAGL).

    But in an effort to elevate the overall airport dining experience and respond to the needs of the airport operating authorities, SSP increasingly partners with independent and local restaurant operators with menus based on area cuisines, tastes and preferences, and has developed its own unique brands, such as bakery café Upper Crust and wine bars Le Grand Comptoir.

    The barriers to entry into this category are high.  As demands and expectations from the airport authorities become more complex and costly, there fewer firms positioned to prosper. SSP America and HMS Host have the largest market share worldwide, and other competitors include Delaware North and AREAS.

    In the US, winning the contract for airport food services is a highly competitive business. Airports typically bid out concession contracts to source and manage all of a facility’s food and retail establishments. The contracts can be in excess of 10 or 15 years, which makes selection critical. For companies to win these lucrative contracts, they need to offer higher-quality food and drink and a premium experience.

    In addition, bidders need to show strong and stable financials to be seriously considered

    Because of the length of the contracts, the capital requirements of the build outs, and the vagaries of operating a restaurant in the face of evolving consumer tastes, airport authorities put bidders through a rigorous financial review.  The contracts usually include a food-and-beverage revenue share with the airport or managing authority for up to 10-20 percent, so bidders have a vested interest in the financial performance of the company.

    Airport authorities look for a combination of liquidity and consistent EBITDA performance over time to protect their interests over the life of the contract.   According to Les Cappetta, CEO of SSP America, the company holds over $250 million in cash on hand in order to “demonstrate we can ensure sustained operating capital through the entire life of the contract without additional leverage.”  Cappetta says that  SSP’s promotes the total financial position of its global parent, SSP Group LTD, to strengthen their financial position. 

    SSP Group is owned by international private equity firm EQT, and Cappetta believes the company’s global financial performance – including worldwide revenues (sales), profitability (EBITDA), and liquidity (cash on hand – allows the company to compete for any contract.  SSP Group has a long track record in Europe and Asia, operating more than 2,150 restaurants and other food outlets at approximately 400 airports, rail stations and highway rest areas around the world.  It generated $2.4 billion in global revenue, and $174 million in EBITDA (cash flow) last year and is able to keep debt service relatively low compared to its growing revenues. 

    While the financial hurdles to enter this relatively small category are high, the rewards can be lucrative and stable over time. I await the day that SSP files to go public – I am in! (The company would not comment on future plans.)  Companies like SSP, which have decades of global experience, are poised to drive noticeable improvements in typical airport dinning experience. 

    So next time you’ve got a layover in SFO or are snowed-in at ORD, don’t despair. Thanks to companies like SSP, you may find your delay just a bit more palatable.

    Hilary Kramer is the editor of GameChangers . She is also president and chief investment officer of A&G Capital Research, a television commentator, bestselling author, and newspaper columnist. She is a frequent guest on CNBC's Halftime Report and Fast Money, and is seen weekly on PBS's The Nightly Business Report.



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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