People walk past some retail shops at San Francisco International Airport on Friday, Aug. 9, 2019. (Kevin N. Hume/S.F. Examiner)

Audit: Small local businesses increasingly left behind at SFO

San Francisco International Airport says it wants more small, local businesses operating concessions in the terminals. But a recent city audit shows the trend is traveling in the wrong direction.

Between 2008 and 2018, the share of concession leases, locations and gross sales at the airport increased for non-local businesses but decreased for local businesses, the audit found. The high cost of establishing a business, a federal ban on granting preferences to local companies and other requirements are likely to blame.

The unfavorable trend over the past decade for local businesses came as leases and locations for concessions at the airport increased, reaching 88 and 165, respectively.

The audit was conducted by Sjoberg Evashenk Consulting, Inc. under contract with the City Controller’s City Services Auditor division for the purposes of examining the airport’s processes for soliciting food and beverage and retail concession leases.

Doug Yakel, SFO spokesperson, said it showed the airport adhered to proper contracting procedures and “confirmed our own observations about financial barriers to small and local business.”

Yakel noted that in 1982 SFO was one of the first airports in the nation to establish a small business affairs office “to increase the participation of small and local business around our airport.”

“We view our role as an advocate for small and local businesses, creating an environment to maximize small/local business participation in all phases of Airport contracting,” Yakel said.

But the audit found the airport “had not consistently tracked and measured its progress toward meeting participation goals,” such as by not consistently tracking small businesses until late 2016.

The audit analysis had to rely on local business data, which is defined as a business with a primary address in nine Bay Area counties: Alameda, Contra Costa, Marin, Napa, San Francisco, San Mateo, Santa Clara, Solano and Sonoma.

The airport did meet its goal in 2018 of having local business in 59 percent of concession leases and 42 percent of locations.

But the audit said that non-local businesses saw their share of leases soar by 44 percent during the past decade, from 25 to 36, while local business leases decreased by 5 percent from 55 to 52.

The number of locations under lease showed a similar trend. Non-local business locations under lease increased by 46 percent, from 65 locations to 96 locations, while local business locations decreased by 11 percent, from 79 locations to 70.

During same time period, Bay Area local businesses’ share of total gross concession sales fell by 10 percent to 49 percent.

The audit also found few San Francisco businesses were applying for a chance to operate at the airport.

High costs were blamed.

For example, businesses must pay a Minimum Annual Guarantee (MAG) as rent, which has “increased significantly over the last decade—from $658,500 in 2008 to $807,600 in 2018, an increase of $149,100 (23 percent).”

“According to the Airport, it is expensive for businesses to operate at an international airport, so national businesses often have an advantage because they can more easily handle the large capital expenditure and staffing demands that some concession leasing opportunities require,” the audit said.

There are also other expenses. Small business advocate Scott Hauge said that one small business airport tenant told him that “the problem is the build outs are really expensive and it takes a long time to recover their cost.”

The audit estimates build-out costs at between $800 to $1,100 per square foot.

The audit provides six recommendations and the airport agreed with five and partially agreed with a sixth in its response to the audit.

One recommendation is that the airport should consider creating a “robust small business participation preference program.”

Sometimes public contracts can include preference points for being local, but the airport is prohibited from doing that due to federal restrictions. However, the airport is allowed to offer preferences for small businesses. The airport agreed with the recommendation.

The audit also recommended the airport reexamine its local and small business goals. The airport agreed to submit a report on the goals to the Airport Commission by the year’s end.

Yakel said that the airport intends to double the size of its Pop-Up Concession program, which provides move-in ready retail spaces that reduce the start up costs for small businesses, and expand it to include a Pop-Up food and beverage program in Harvey Milk Terminal 1.

He also said that there are an increasing number of joint venture agreements between local and non-local operators.

“For example, in the new nine-gate section of Harvey Milk Terminal 1 which opened July 23rd, six of the nine new concessions are locally-owned, and the remaining three incorporate local ownership through such joint venture agreements,” he said.

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