Denver International Airport Concessions Management

104 Pages·2014·11.04 MB·English

Denver International Airport
Concessions Management
Performance Audit
February 2014
Office of the Auditor
Audit Services Division
City and County of Denver
Dennis J. Gallagher
Auditor
The Auditor of the City and County of Denver is independently elected by the citizens of Denver.
He is responsible for examining and evaluating the operations of City agencies for the purpose
of ensuring the proper and efficient use of City resources and providing other audit services and
information to City Council, the Mayor and the public to improve all aspects of Denver’s
government. He also chairs the City’s Audit Committee.

The Audit Committee is chaired by the Auditor and consists of seven members. The Audit
Committee assists the Auditor in his oversight responsibilities of the integrity of the City’s finances
and operations, including the integrity of the City’s financial statements. The Audit Committee is
structured in a manner that ensures the independent oversight of City operations, thereby
enhancing citizen confidence and avoiding any appearance of a conflict of interest.

Audit Committee
Dennis Gallagher, Chair Robert Bishop
Maurice Goodgaine Jeffrey Hart
Leslie Mitchell Timothy O’Brien, Vice-Chair
Rudolfo Payan

Audit Staff
John Carlson, Deputy Director, JD, MBA, CIA, CRMA, CGAP
Sonia Montano, Internal Audit Supervisor, CGAP, CRMA
Tim Waddingham, Senior Internal Auditor, MS
Kelsey Yamasaki, Senior Internal Auditor, MPP

You can obtain copies of this report by contacting us at:

Office of the Auditor
201 West Colfax Avenue, Department 705  Denver CO, 80202
[phone]  Fax [phone]

Or download and view an electronic copy by visiting our website at:
www.denvergov.org/auditor
City and County of Denver
201 West Colfax Avenue, Department 705  Denver, Colorado 80202  720-913-5000 
FAX [phone]  www.denvergov.org/auditor
Dennis J. Gallagher
Auditor

February 20, 2014

Ms. Kim Day, Manager of Aviation
Department of Aviation
City and County of Denver

Dear Ms. Day:

Attached is our Denver International Airport (DIA) Concessions Management performance
audit. The purpose of the audit was to assess both the Premium Value Concessions (PVC)
Program and the Request for Proposal (RFP) process. Specifically, we sought to determine
whether the PVC Program is sufficiently administered and managed in accordance with the
governance surrounding the Program and whether that governance is sufficient to adequately
meet the goals of the Program. Additionally, the audit analyzed whether the concessionaire RFP
evaluation and selection process is administered fairly, is aligned with DIA’s business and
development goals, and communicates upcoming concession opportunities appropriately.

The opportunity for concessionaires to enter into direct negotiations with DIA for a concession
agreement is invaluable. Well run concessions programs emphasize an equitable, appropriate,
and transparent system of awarding concession agreements – whether to new or existing
tenants. Our performance audit reviewed the current processes of obtaining and renewing
concession agreements through various competitive selection methods.

Our review identified several areas of opportunity that will improve DIA’s Concession Policy, as
well as enhance DIA’s ability to reward the top performing concessions in the PVC Program. Our
recommendations will improve transparency in the evaluation and selection of concession
proposals submitted through the RFP Process.

I remain concerned that DIA concession’s contracts are being operated and/or owned by an
increasingly small group of companies and individuals. It is troubling that DIA would change the
percentage limits that a concessionaire can hold – from 20% to 24% – to seemingly
accommodate one large vendor. Additionally the methodology for calculating ownership
percentages has been changed and this has also seemingly benefited the large concessions
groups. If a slightly broader definition of what constitutes a business affiliation were to be applied
the square footage percentage limits become meaningless with the largest DIA concessionaire
having ties to over 35% of the square footage within a category.

Another way of viewing this inequity can be found in the percentage of revenue reported:
Within the Food and Beverage category, three entities and their affiliates make up half of all
revenue in the category.

To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services
that provide objective and useful information to improve decision making by management and the people.
We will monitor and report on recommendations and progress towards their implementation.
Ms. Kim Day
February 20, 2014
Page 2

When the creation of DIA was first proposed it was promised that local ―mom and pop‖
operations would have a fair shot at taking advantage of the opportunities that this amazing
economic generator can provide. During my years on City Council we heard this argument over
and over again. Looking at the concessions ownership percentages I worry that the small retailer
is being frozen out of the process.

We hope that our findings and the thoughtful recommendations presented in our report will
assist with the enhancement of an evolving, complex, and multi-layered concessions program
at DIA.

We applaud DIA for its desire to offer the traveling public an eclectic mix of options when they
travel to Denver via its airport. Growing this program successfully will add value to the City.

If you have any questions, please call Kip Memmott, Director of Audit Services, at 720-913-5000.

Sincerely,

Dennis J. Gallagher
Auditor

DJG/tw

cc: Honorable Michael Hancock, Mayor
Honorable Members of City Council
Members of Audit Committee
Ms. Cary Kennedy, Deputy Mayor, Chief Financial Officer
Ms. Janice Sinden, Chief of Staff
Ms. Beth Machann, Controller
Mr. Scott Martinez, City Attorney
Ms. Janna Young, City Council Executive Staff Director
Mr. L. Michael Henry, Staff Director, Board of Ethics
Mr. Patrick Heck, Chief Financial Officer, Aviation
Mr. John Ackerman, Deputy Manager of Aviation Commercial

To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services
that provide objective and useful information to improve decision making by management and the people.
We will monitor and report on recommendations and progress towards their implementation.
City and County of Denver
201 West Colfax Avenue, Department 705  Denver, Colorado 80202  720-913-5000
FAX [phone]  www.denvergov.org/auditor
Dennis J. Gallagher
Auditor
AUDITOR’S REPORT
We have completed our audit of the Concessions Management at Denver International Airport
(DIA). The purpose of the audit was to assess both the Premium Value Concessions (PVC)
Program and the Request for Proposal (RFP) process administered at DIA. Specifically, the audit
aimed to determine whether the PVC Program is sufficiently administered and managed in
accordance with the governance surrounding the program, and whether the governance
surrounding the program is sufficient to adequately meet the goals of the PVC Program.
Additionally, we sought to determine whether the concessionaire RFP evaluation and selection
process is administered fairly, is aligned with DIA’s business and development goals, and
communicates upcoming opportunities appropriately.
This performance audit is authorized pursuant to the City and County of Denver Charter, Article
V, Part 2, Section 1, General Powers and Duties of Auditor, and was conducted in accordance
with generally accepted government auditing standards. Those standards require that we plan
and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis
for our findings and conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on our audit
objectives.
Our audit found that although the PVC Program is administered in accordance with Rule 45,
Rule 45—as written—is inadequate for the goals of the PVC Program. Most notably, Rule 45 does
not consistently and significantly differentiate between top performers and non-top performers
in the areas of customer service and financial performance. Additionally, not all minor
merchandising categories foster legitimate competition, as some concessions were eligible for
the Program Benefit despite having no competition through Phases 1 and 2 of the PVC Program.
We also determined that the Rule 45 financial scoring metrics can be enhanced to better align
with Program goals. Further, we analyzed the concentration of ownership policy and
determined that the threshold was increased from 20 to 24 percent in October 2013, and that
immediately prior to this change, one concessionaire exceeded the 20-percent cap. Finally,
although the communication and outreach efforts of the DIA Business Development Division are
adequate, we found that the evaluation and selection of bids in the RFP process lack
transparency.
We extend our appreciation to DIA staff who cooperated with us during our audit.
Audit Services Division

Kip Memmott, MA, CGAP, CRMA
Director of Audit Services

To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services
that provide objective and useful information to improve decision making by management and the people.
We will monitor and report on recommendations and progress towards their implementation.
City and County of Denver – Office of the Auditor

Audit Services Division

REPORT HIGHLIGHTS

Denver International Airport Concessions Management

February 2014

The au dit assessed the Premium Value Concessions Program and Request for Proposal process to

determine that proper controls are in place to ensure the evaluation and selection process is appropriate.

Background
Highlights
In 2012, Denver International Airport
The audit has three findings:
(DIA) concessions generated nearly
$250 million in revenue, of which Finding 1: DIA personnel and the third-party administrator tasked with
nearly $50 million was remitted to implementing the PVC Program consistently adhere to Rule 45, which governs
the airport. Concessions are selected
the PVC Program at DIA. However, based on our analysis, Rule 45 provisions do
through a competitive Request for
not ensure that top performing concessions are consistently identified due to
Proposal (RFP) process governed by
ineffective scoring metrics and weaknesses with minor merchandising category
City rules, regulations, and airport
policies & procedures. To grow provisions. As a result, there are inherent inequities with the program as
concession revenue and improve currently designed.
performance, DIA management
Finding 2: The DIA Concession Policy is outdated and can be revised to better
developed the Premium Value
meet the goals of the concessions program. Based on our review of the Policy,
Concessions (PVC) Program. Through
the sections related to revenue reporting and the RFP Evaluation Committee
competition, the PVC Program
awards top performers with the membership need to be updated and enhanced to reflect actual practices and
opportunity to enter into direct close identified gaps. Additionally, the section of the Policy regarding
negotiations for new concession concentration of concession ownership was increased when a concessionaire
contracts in lieu of going through the exceeded the concentration percentage allowed by the policy.
RFP process.
Finding 3: DIA management and personnel are effectively communicating
Purpose
upcoming concession opportunities and requirements of operating a concession.
The objective of our audit was to However, we could not determine if the actual evaluation and scoring of
assess whether the PVC Program is proposals submitted under an RFP advertisement are fair and appropriate
meeting the established goal of because DIA management and personnel do not maintain, document, or store
encouraging concession revenue individual evaluation committee member comments and scores for each
growth and if it is sufficiently
proposal. City rules and regulations, in addition to DIA policies and procedures,
administered in accordance with the
should make it explicitly clear that all documents related to the evaluation and
governance of the PVC Program. We
scoring of proposals under an RFP advertisement are maintained for future
also sought to determine if the
review.
Request for Proposal process as it
relates to the evaluation, scoring,
and selection of concessionaire
For a complete copy of this report, visit www.denvergov.org/auditor
proposals is administered fairly and
or contact the Auditor’s Office at 720.913.5000
appropriately.
TABLE OF CONTENTS

INTRODUCTION & BACKGROUND 1
Overview of Denver International Airport Business Opportunities 1
DIA Commercial Division 1
Concession Request for Proposal Process 2
Concession Revenue and Opportunities at DIA 4
Premium Value Concessions Program 6
SCOPE 10
OBJECTIVE 10
METHODOLOGY 10
FINDING 1 11
The Premium Value Concessions Program Should Be Modified to
Fairly, Accurately, and Consistently Identify and Reward Top-
Performing Concessions 11
RECOMMENDATIONS 22
FINDING 2 23
Denver International Airport’s Concession Policy Is Outdated and
Can Be Revised to Better Meet the Goals of the Concessions
Program 23
RECOMMENDATIONS 31
FINDING 3 32
The Evaluation and Scoring of Proposals under the RFP Process
Lack Transparency 32
RECOMMENDATIONS 37
APPENDICES 38
Appendix A – Rule 45: Premium Value Concessions Program 38
TABLE OF CONTENTS
(continued)

Appendix B – Denver International Airport Concession Policy 66
AGENCY RESPONSE 89
INTRODUCTION
& BACKGROUND
Overview of Denver International Airport Business Opportunities
In addition to generating revenue from the rentals, fees, and charges received from the
airlines that operate at Denver International Airport (DIA), non-airline sources account for
a significant percentage of total airport revenue each year. In 2012, non-airline
businesses accounted for approximately 46 percent of operating revenue at DIA.1
There are a plethora of business opportunities at
DIA, ranging from routine procurement of goods
and services to long-term concessions and
construction opportunities. DIA’s concessions
program consists of more than 171,000 square
feet and over 140 merchant operators. In 2012,
the concession program generated nearly $237
million in gross revenue and more than $50 million
in revenue for DIA.2
Additionally, DIA has $1.5 billion in capital improvement projects planned to strengthen
and grow the economic impact of the world’s tenth-busiest airport. Of that capital
investment, $544 million is budgeted for a new Hotel and Transit Center, which will
include a public plaza that will offer additional opportunities for concessions. Businesses
and prospective concessionaires can find information they need to connect to the
airport’s wide-array of economic opportunities on business.flydenver.com or at the DIA
Commerce Hub, located in the Jeppesen Terminal.3
DIA Commercial Division
The Commercial Division at DIA (Division) is tasked with identifying and developing new
business opportunities to support DIA’s strategic objectives. The Division’s portfolio
includes typical airport businesses such as airline leases, rental cars, parking, and
concessions, as well as commercial real estate development and production of natural
resources. The Division is charged with developing and monetizing all airport assets,
including terminals, land, and minerals. The Division oversees the airport’s oil and gas
production and leads the Airport City Denver real estate development program.

1 Denver International Airport Press Kit, July 2013, p. 17, accessed December 17, 2013,
http://business.flydenver.com/info/news/pressKit.pdf.
2 2013 Mayor’s Budget Book. http://www.denvergov.org/Portals/9/documents/budget_2013/2013_Budget.pdf.
3 “Connecting Business to Opportunity: Business Opportunities,” Denver International Airport, accessed December 9, 2013,
http://business.flydenver.com/bizops/index.asp.

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DIA management has identified the following three goals related to the Division’s
mission.4
1. Continually reevaluate ways of doing things, always pushing the envelope to
develop new approaches to improve operations, and the ability to respond to
and anticipate changes in the dynamic airport industry
2. Work to better understand airport partners and passengers in order to be able to
accommodate their needs both today and in the future
3. Balance essential elements to provide a competitive and vibrant environment
Concession Request for Proposal Process
DIA leadership works to build strong partnerships with the business community and ensure
that local businesses have opportunities to help build a sustainable and successful future
for DIA. The City and County of Denver and DIA are dedicated to increasing
Minority/Women Business Enterprise, Disadvantaged Business Enterprise, and Small
Business Enterprise participation in all DIA projects. DIA procurement procedures attempt
to create a fair, transparent, and competitive process.
Concessions at DIA are selected through a Request for Proposal (RFP) process. An RFP is
defined as any solicitation of pricing for supplies where an award is made in
consideration of best value and not necessarily lowest price from a responsive,
responsible, qualified proposer. An RFP may also be referred to as a competitive sealed
proposal.5 Whenever DIA has concession space to lease, the Business Development,
Concessions Management, and Revenue Procurement teams work together to issue an
RFP that describes the space available, concepts desired, City requirements for
operating a concession at DIA, and documents that must be submitted, along with any
other requirements. Concession RFPs issued by DIA fall under the following four
categories:
1. Food/Beverage
2. Specialty Retail
3. Consumer Services
4. Entertainment/Amusement
The RFP process is governed by various City rules and regulations and DIA policies and
procedures. The primary rules and policies that govern the RFP process at DIA include:
 Denver Revised Municipal Code (D.R.M.C.) – Outlines the formal procedures,
which entail formal advertisement by official publication that precedes the
issuance of any bidders’ proposal or request. It also outlines procedures with
which City offices, agencies, and departments must comply when procuring
goods and services through an RFP process.

4 2013 City and County of Denver Budget Book.
5 D.R.M.C. § 20-61. Definitions.

City and County of Denver
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