What is going on in gaming? By Ken Adams, CDC Gaming Reports September 26, 2021 at 7:54 pm Casino revenues and profits are up, but fewer customers and other serious economic issues are impacting the gaming industry. What is going on? The post-pandemic economy is a mixed bag. Signs of recovery are accompanied by warning flags. The unemployment rate has returned to something close to 2019 levels, but 10 million jobs remain unfilled, particularly in service industries. Gaming is plagued with limits on an operation’s ability to deliver services due to a shortage of employees. Daily there are articles about small businesses closing their doors, because they don’t have enough employees to conduct business. There are also stories about wages increases, without any governmental prodding; wages are going up dramatically in many sectors. Companies like Walmart and Amazon, notorious for low pay, have raised their pay scales significantly. Besides raises to basic salaries, many, if not most, companies are offering hiring and retention bonuses. Recently, an Indian casino in California offered a $2,500 bonus for cooks. Thousand-dollar bonuses are becoming common, as are hourly wages about $15. Adding to the complexity is a shortage of materials. For casinos, that can include paper products, food, and cleaning materials, among other things. Supply chains for many products have been disrupted, lowering their availability. For example, housing prices are escalating in part because lumber supplies are limited, delivery times are uncertain, and the cost is soaring. This has led to a shortage of homes for sale and rent driving up prices. Fuel, groceries, and other essentials are under pressure from the same forces. My local supermarket shelves look much like they did in the first few months of the pandemic: empty. Rarely are the shelves fully stocked in the “old” way. Something is always in short supply or not available at all. Combined with the shortage of employees to do the ordering and stocking and the supply-chain disruption, my local store often looks like one in the developing world in the midst of a civil war. As we all know, car dealerships and parts distributors, florists, toy stores, gas stations and many others are having the same issues. The reasons are different in each industry, but the problem is common across them all. Casinos, specifically, are being hit by both the labor shortage and the disrupted supply chain. And yet it is a banner year for revenue and profits. Given those problems, why are revenues so much better? It is a head scratcher. The most common answer is pent-up demand. People are eager to be out and about after being locked in for months. Another explanation is the increase level of unemployment compensation. Millions of unemployed people received regular checks, while having lots of free time on their hands. A third regularly cited cause is the federal stimulus, found money intended to jump-start the economy. In the case of casinos, it is doing its job. In addition, Carlo Santarelli, an analyst for Deutsche Bank, thinks he has found another source of the cash people are using to gamble: It is borrowed from other industries. Santarelli is becoming the go-to guy in gaming analysis; no report on corporate earnings, jurisdictional revenue, or trends in gaming is complete without one of his quotes. He is not without his critics. Dave Portnoy of Barstool fame suggested Santarelli should be fired for being “catastrophically wrong.” Santarelli suggested that Penn National, a stakeholder in Barstool, was a sell, not a hold or a buy as other analysts had rated it. Portnoy took it personally. Still, Santarelli does his homework and knows the gaming industry as well as anyone on Wall Street. In a report, Santarelli wrote that between April and July 2021, an estimated $18 billion in recreational spending shifted from amusement parks, movie theaters, concerts, live spectator sports, and other recreational and entertainment options to casinos, sports betting, and other forms of legal gambling. In his analysis, Carlo includes horse racing, lotteries, and online gambling, as well as casinos. He does not say that casinos got the whole kit and kaboodle, but a healthy share. According to my calculations, between April and July 2021, casinos, VLTs, igaming, and sports betting generated $18.7 million, compared to $5.1 billion in 2020 when the industry was shut down for part of the year and $14 billion in 2019. Those numbers do not include lotteries, horse racing, or Indian gaming. The difference between 2021 and 2019 is $4.7 billion, an increase of 33 percent. Part of it comes from the increase in sports and online gambling in the last two years. The remainder could easily have come from other recreational industries. Certainly, live concerts and movie theaters are just starting to recover from the pandemic. Another interesting possibility for the casino boom is season tickets to live sporting events. Let’s call it the “DJM Theory,” named after a friend who suggested it. Most season tickets holders, and there are millions of them, opted to defer their 2020 tickets, when seats were empty, until this year, rather than asking for a refund. So now they have money that they would have allocated on another season’s worth of tickets. What better way to spend some of that money than head off to a casino? For example, DJM estimates that in the Denver area alone, more than $200 million in season tickets were paid for in 2020 — $200 million burning a hole in the pockets of fans. This year, Denver Bronco fans can bet on the games in Colorado remotely and in person; in addition, the tables in Black Hawk have new and much higher limits. If just 10% of that money finds its way to the casinos in Black Hawk, it will have a big impact. The subject is complicated and resists any simple, one-dimensional solution. But casino revenue is up and the money is coming from somewhere. Undoubtedly, one place is the government and the pandemic stimulus programs. According to the Santarelli displacement theory, other places helping to fuel gaming are entertainment venues that have not fully reopened. And then there is the DJM season-ticket-holder theory. Whatever the source, casinos are generating more revenue. Santarelli ended his analysis by saying we will just have to wait and see how long the trend lasts. And so say I.