Opening Up for Business By Andrew Tottenham, Managing Director, Tottenham & Co July 7, 2020 at 3:33 pm European countries are emerging from lockdown and gambling businesses are reopening. No one knows what to expect, other than business is likely to be down compared to before the pandemic struck. It appears that every country is allowing casinos to reopen, with the exception of the UK. This may have something to do with the UK government’s late response to the growing threat from the virus. Countries that have reopened are taking different approaches, but most are requiring social distancing and mask wearing for both customers and employees and that sanitising measures have been put in place. Whatever the requirements, most customers will want to feel safe or they will not return. This reopening is not without risks. The more people interact, the more the virus spreads. Evidence seems to suggest that spending time in an enclosed environment with someone who is infectious increases the risk of the disease spreading significantly, even if surfaces are vigorously cleaned and recleaned. In order to reopen, casinos in most countries are being asked to restrict the number of customers per gaming table. This can be as low as three people or less per table, which greatly impacts the profitability of the table games. Early indications are that business is down around 25%, more on table games (more than 50% down in some locations) and less on slot machines. Unsurprisingly, electronic table-game revenues are up. The primary driver is fewer visitors rather than less money staked. Revenues in casinos that are destinations, i.e., that depend on tourists, especially international visitors, are down significantly more than those that cater to locals. Annual holidays have been delayed, although if you think about it, the safest time to travel, visit a casino or get your hair cut is probably right after lockdown has been eased, when the infection rate is at its lowest. Some casinos and poker rooms have not survived. In the UK during June, Genting announced that three of its casinos would not reopen and a card-room manager announced that none of the poker rooms would be reopening. Caesars UK said that their casino in Southend would not reopen and Rank announced that 12 “venues” would remain closed until at least October, while they “assess their ongoing viability”. They were not clear about what venues they were referring to. When the casinos reopened, owners breathed a sigh of relief and were pleasantly surprised by how high the initial results were. But in Aristotle’s words, “one swallow does not a summer make”. Just because the first few weeks saw visitation and revenues numbers higher than expected, it does not mean they will stay that way. It is similar to the hairdressing business. When people are allowed to have a haircut for the first time in months, everyone goes out and gets one and hairdressers are very busy, but demand soon settles down. Until the coronavirus is brought under control, the economics of casino gambling will remain changed and, in some cases, dramatically. Management has a choice: either wait to see what happens, which I do not recommend, or cut costs now. I believe the economy will get worse before it gets better; thus, action needs to be taken now to right-size the business and allow it to survive, even in the event of a much-deteriorating economy. Why do I believe things will get worse? Firstly, I should make clear that the economic downturn because of this pandemic is markedly different from the 2008-2009 global financial crisis. That was one of massively reduced banking liquidity and rapidly declining asset values. For the moment, banking liquidity has been unaffected and asset values are holding up. Stock markets are almost where they were at the end of last year before anyone had ever heard of this coronavirus. This is a crisis caused by reduced demand. Despite the efforts of governments around the globe to pump money into their economies, the fact that people have not been going out and buying goods and services has reduced demand. Opening things up is increasing demand, but it will take some time before we get back to pre-COVID-19 levels. As I said, reopening is not without risks and as people move around more, we are seeing flare-ups of the disease. If these flare-ups become significant, they will dent investor and consumer confidence. Also, once furlough schemes are stopped and stimulus checks are no longer forthcoming, unemployment will work its way into the system. After the initial layoffs and governments turning off the taps, lack of demand will inevitably lead to more unemployment, leading to even less demand. Gambling businesses need to be prepared for this. Three big costs are associated with operating a land-based gambling venue: gaming taxes and duties, rent (and property taxes) and payroll and benefits. The first on the list is exceedingly difficult to get reduced. Without a compliant landlord, the second is hard to do as well. That leaves employee costs. These are mostly within management’s control. It is better to take the hit now rather than continue to operate as if little has happened, sucking up losses, depleting cash resources and shattering investor confidence in management’s ability to manage. I recently worked on an assignment for an investor to advise on management’s plans for restructuring and whether more could be done to reduce losses and secure the business for the future. Based on management’s plan, the investor was looking at significant losses for the next few years and in the face of this was prepared to immediately close the business. Working with management and helping them to look differently at their business — for example, how they might change the product offer, restructure employee responsibilities by introducing flexibility and schedule staff according to demand — they were able to develop a plan that met the investor’s needs and secure the future of the business. Crises require responses. By taking strong action now, a business will be in a better position to survive the worst and grow when things inevitably get better.