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ENTERPRISE–Airport Contracts Have Creative Host Services Flying Over Competitors

Looking for a way to boost revenues and gain more control over his company, Sayed Ali switched the firm’s market from shopping malls to airports.

Today, thanks to that move, Creative Host Services Inc. finds itself cruising at uncharted heights, continuing a strategy of acquiring and operating airport food and gift concessions.

Publicly traded CHS, headquartered in Sorrento Valley, now owns 43 concession outlets at 21 small- and medium-sized airports around the country. About three years ago, it had only 16 outlets at 10 airports.

“Our company is now poised for tremendous growth,” said Ali, CHS’s soft-spoken president. “There are about 400 commercial airports in the United States and of those, 123 are small- and medium-sized.”

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That fact, coupled with an expected rise in airport traffic and a nearly debt-free balance sheet, has recently boosted CHS stock from less than $1 to above $10 over the past 52 weeks.

Last week, the stock was trading above $9.

Jim Creamer, a stock analyst with EBI Securities Corp. in Englewood, Colo., who helped take CHS public in 1997, said he was “pleasantly surprised” by the stock run-up.

Several months ago, CHS overcame a hurdle faced by many smaller companies , refinancing debt without having a strong stock price.

“Once you get your stock price and market capitalization up, it certainly increases your financing options,” he said.

With a stronger balance sheet, some larger institutional investors took notice and purchased shares. Because of the firm’s small trading float of about 1 million shares, that likely caused the relatively swift hike, Creamer said.

Ali’s low-key demeanor belies the fact that in the last few months his personal net worth in the stock has skyrocketed tenfold from about $1 million to $10 million.

The 52-year-old Poona, India, native insists he doesn’t check the stock daily, nor has the new wealth changed his lifestyle. He’s too busy working on new airport deals and getting into related businesses.

Struggle For Success

The basic niche that CHS carved out some 10 years earlier has certainly paid off, but the success the firm is having now didn’t come easily, Ali said.

“The first 10 years were very tough years for us,” he said. “It’s true what they say that the grass always looks greener on the other side.”

Ali started his enterprise on a completely different model than the one that exists today. In 1987, the former director of manufacturing for Oak Industries, a San Diego maker of set top boxes, was looking to start a healthy food caf & #233; franchise.

“I was looking to start a business that could be franchised and focused on consumables. That led me to look closely at the food segment of the industry,” he said.

Ali found what he was looking for at Fashion Valley Center. His original investment was the purchase of a baked goods retailer called the Bake Basket. He revamped the menu to add salads, sandwiches and other fresh foods, and changed the name to Creative Croissants.

Over the next four years, the business expanded to about 35 stores, mostly in California cities of San Diego, Los Angeles, Sacramento and the Bay Area. The concept seemed to be working well, but Ali wasn’t satisfied.

“I realized the weakness of franchising,” he said. “We didn’t have the full infrastructure to monitor (the other stores) for consistency and quality. Also, we had some locations that didn’t turn out to be as lucrative as we thought.”

Adding to Ali’s frustration was a much tougher competitive market in the shopping malls, increasing rents for a dwindling number of prized locations and thinner profit margins.

Captive Market

Ali decided to look at a much different way of retailing food, the so-called “captive consumer market.”

The term refers to places where consumers have limited or no other choice if they want to buy food or drink, such as sports arenas, convention centers, colleges, hospitals and corporations.

Early on, Ali saw one of these captive markets that seemed almost too good to be true: airports.

Not only do airport terminals have a constant stream of passengers, the food concessions usually have long-term contracts with the public airport operating authorities, a predictable revenue stream, and a finite amount of competition that usually doesn’t overlap.

In other words, the concessions were practically a slam dunk.

Reducing the risk further, many airport bid packages included data on past revenues for the leases and airport traffic figures, allowing bidders to make accurate predictions on what was expected from the outlets.

The problem for Ali was his lack of experience in the sector, but that didn’t deter him. In 1990, Creative Croissants beat out 27 other bids for a concession stand at Orange County’s John Wayne Airport.

In awarding bids for concession outlets, airports consider proposed lease rental payments, but other factors weighing in the decision are the experience of the bidder, the concept and design of the concession, and proposed capital investment, Ali said.

“We’re being very creative at what we do,” Ali said. “We’ve tried to look at what the traveling public needs at an airport.”

With the John Wayne concession under his belt, Ali bid on and won another concession at Denver International Airport the same year. From there, the firm added a few more airports each year.

Smaller Facilities

Rather than aiming at the biggest airports, CHS found success in bidding at smaller and medium-sized facilities. Among the airports that contain a CHS outlet are Allentown, Pa.; Des Moines, Iowa; Greensboro, N.C.; and Midland/Odessa, Texas.

About three years ago, CHS won the concession contract for Sioux Falls, S.D., Regional Airport. CHS invested about $350,000 in converting a former sit-down restaurant into a food court with seven or eight different types of foods.

Travelers to the airport tend to like the new food court that opened last year, “because it’s fast and it’s good,” said airport director Michael Murnach.

But some locals still miss the older place, which had waitresses, he added. “The problem is today, you get to the airport, park the car, maybe grab something quick, and then you go.”

When the master leasehold for Lindbergh Field expired about five years ago, CHS made a strong bid but was beat out by Host Marriott Corp., which has held the lease for more than 20 years, Ali said.

Rita Vandergaw, spokeswoman for the San Diego Unified Port District, which operates Lindbergh Field, said CHS’s bid was competitive but the deciding factor in Marriott’s bid was the sizable capital investment for the concessions, especially those in the renovated airport terminals.

While Host Marriott controls about 80 percent of the national airport concession market, Ali proudly notes CHS has recently beat out the dominant industry player at three airports.

Last year, CHS went to the capital markets to borrow about $7 million to invest in renovations at those airports, which included building nine separate concessions. It has since paid off about half that debt, Ali said.

In addition to operating the Creative Croissants Bakery/Deli concept at various airports, CHS also has joined with major retail brands such as Carl’s Jr., Taco Bell, Little Caesar’s Pizza, TCBY Yogurt, and Mrs. Field’s Cookies.

The arrangement with the major brands calls for CHS paying licensing fees to sell the products, which reduces the profit margins. But the upside is customers know these brands, and the relationships are helped when CHS makes bids on new airport leases, Ali said.

Along with the branded outlets, CHS often inculcates local cuisines and designs into its concession concepts. In Greensboro the company operates a barbecue outlet. At the airport in Madison, Wis., where the University of Wisconsin is located, CHS built a reading room close to a coffee shop that was well received by the passengers. There is a food stand selling Creole food at the Baton Rouge, La., airport.

Ali expects to add an average of five airports annually over the next five years, he said.

That growth should increase the company’s current employment of 550 workers to about 650 by the end of this year. There are 35 staffers at its San Diego headquarters.

Ali engineered the company’s public offering in July 1997, a move intended to help in acquiring new airport concessions. While the IPO raised some $5 million, the stock languished, trading below $2 for the better part of two years.

That’s all changed now. Ali said part of the reason is that CHS is being more aggressive in telling its story, and part of it is the firm’s improved balance sheet.

Growth appears steady. Next year, revenues should reach $22 million, and they’ll be in three to five new airports.

Though Ali would never say it, “Look out Host Marriott, there’s someone gaining on you.”

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