Casino operators experiencing a strain on profits have cut even deeper by undertaking work-force reductions, downsizing table games and/or the operating hours of table games, closing restaurants and gaming pits and removing layers of management. The balancing act facing all casinos in an environment of declining revenues is how to optimize costs in a fixed-cost business without negatively impacting the customers’ experience. Cutting back on marketing, customer service or maintenance capital expenditures may alleviate short-term financial difficulties but may store up problems for the future.
KPMG works closely with a number of key players in the gaming industry in both Canada and the United States. To understand the current environment, we spoke to a number of our clients with whom we work on a regular basis to gather their views. One of the operators summarized the current situation as follows: “We are seeing a lot of short-sightedness out there. Some operators have liquidity issues and are cutting capital, marketing and staffing. I am not convinced they are thinking about what they are doing; they seem to be panic measures. These types of cuts make it harder to get customers back, assuming they will want to come back.” In light of apparent challenges, what can operators do to cut their costs while still maximizing the quality of the customer experience?
We believe that gaming organizations that hope to weather the current storm and be successful in the long run should not just be reducing costs but optimizing them. They should find the balance between lowering expenditures and still providing the level of quality, service and experience that their patrons have come to expect, all while managing business risk and regulatory restrictions.
With the reduction in cash flow, current economic conditions and uncertainty of the United States credit markets, we have seen many casinos delaying capital spending by at least a year or two. Even the North American projects that are moving forward are being carefully managed, e.g., to keep the City Center in Las Vegas project on track (where a credit facility was secured prior to the economic downturn along with cash assistance from a Saudi Prince), MGM will continue cutting other costs and preserving capital.
The ability of casinos to attract customers will continue to be a key success factor of the industry. Many casinos have access to massive customer databases with varying degrees of information about their customers. At the most basic level this data is used as a mailing list to understand where customers travel from, how frequently they come and how much they spend. However, the potential insights contained in this data far exceed current usage by some casinos. Some larger casino groups have pooled their data and have analyzed their customer base with a far greater degree of granularity. Also, they have analyzed the way of thinking about customers and enhancing their return in terms of total volume of traffic, frequency and spending per visit. Customers are now being segmented into different categories, and marketing departments will know what marketing efforts work more effectively and what has limited impact. For example, John Shaw states, “many US casinos are reducing promotional spending targeted at the low-end customer in their marketing database—people spending $100 or less. This type of retail customer will not venture out to the property in this economy.”
Knowing the return of investment by customer segment for different marketing strategies is a powerful tool. This is essential knowledge at all times of the economic cycle but during an economic slowdown the ability to quickly know what cuts you can make to your marketing budget and determine the impact these cuts will have is imperative. As one client succinctly describes, “it is like dropping a smart bomb into the marketing spending rather than a nuclear bomb. We have targeted a specific area and we know what impact it will have.”
The nexus between branding and the customer experience
Another key—and often overlooked—success factor is branding and customer experience. The increasing revenues and venue expansions of the past decade have let many operators, particularly smaller casinos in local markets, grow at a healthy rate without having to devote time and resources to their brand in the marketplace. To make it through these times of uncertainty, operators will have to be very careful about reducing costs in these critical areas and may need to consider additional branding, customer loyalty and customer experience programs to keep patrons coming back. A good example of this approach can be seen at Caesars Windsor where the recent re-branding has included significant upgrades in both customer service and loyalty programs.
Over the past decade, we have seen the Canadian casino market transition from solely focusing on gambling towards more entertainment-based attractions. While this substantially increases the potential profit pool for casinos to tap into, it also increases the competition they have to consider. Adding restaurants, coffee shops, concert theatres and convention centers may widen the potential attraction for potential customers, but it also layers complexity into the organization. Also, this complexity increases the pressure points where customer service can fall below required standards. Effectively and efficiently managing this complexity as well as reducing the risks associated with increasing the number of customer-service pressure points, especially when times get tough, can deliver a significant competitive advantage.
As the slowdown continues to reduce consumers’ discretionary spending, the key differentiators of casinos will come into sharper focus. Heavy reductions in food and beverage expenditures that reduce the quality of the offering or a reduction in the volume or quality of acts in the theatres will likely diminish any competitive advantage that the casino may have over other local competitors. Food, beverage and entertainment serve as destination-drivers; they are part of the brand differentiation. One client stated, “we need to maximize our revenue through our current assets. Once you start pulling back on those areas then it starts becoming a self-fulfilling prophecy. We need to continue to leverage our assets.” However, the current environment also provides an opportunity. For example, some casinos, notably in Las Vegas, have changed their focus of spending from top tier restaurants to mid tier restaurants in order to attract the discretionary spending of patrons who previously would have ventured to top tier restaurants.
Big or small: know your customer
There are some opportunities on the customer pull-side of costs but only if they are thought about in a more considered manner. Smaller casinos will not have the resources to undertake deep data-mining exercises to drive marketing spending out of the business. They will have to rely on their staff that know the customers and can report back on what works and what does not from a customer pull perspective. The depth of understanding from this method will get them some of the way there but will lack the rigour that larger competitors will have.
The service delivery costs are all of those that impact the customer while they are at the casino facility. Typically when thinking about potential cost reductions, an easy target has been headcount. Recent years have seen the increasingly widespread introduction of “ticket in, ticket out” machines. These machines require far fewer people to service customers’ requirements. Jurisdictional supervisory requirements will put a floor on the number of people required on a shift basis and union agreements may also add further complications. However, the outcome of this is that the traditionally easy targets for cost reductions may no longer be there. Also, the closure of tables has to be managed carefully so as not to give the appearance that the casino is closing down or scaling back.
It is possible to manage costs more effectively without fundamentally impacting the customer experience. For example, there may be some areas that are open seven days a week that may only be required for two or three days based on customer demand. A coffee shop may fall into this category. If possible, increasing the number of part-time workers may help infuse greater flexibility into the organization. Data analysis, such as the ratio of the number of coffee shop employees to the number of customers (segmented by time period), provides a starting point of fact-based information to help with these critical decisions.
Smaller casino groups tend to instill flexibility into their organization by having staff work across departments. As things get tougher, this flexibility can get used up quite quickly as demands placed on individuals may result in an increased risk of reduced customer service. Larger casino organizations will be able to look beyond the obvious cost-optimizing opportunities to understand where some additional costs can be reduced. Those organizations with more than one or two casinos may be able to generate cost-optimizing opportunities through their enterprise resource planning system. The ability to benchmark departments’ operations across a number of casinos will highlight areas of weakness or opportunity for further investigation. For example, a relatively higher number of slot supervisors in Casino A relative to Casino B may indicate an efficiency opportunity. However, it may simply be a jurisdictional requirement difference. Without the data it is impossible to have that conversation. Tom Vandeloo, Partner in KPMG’s Operational Improvement practice, says, “the potential value that can be saved in a downturn by the more effective use of information that they already have is huge. There is a great opportunity for the gaming industry to take a measured and smart approach to oncoming economic problems that should reduce the downside risk.”
The data and knowledge that larger casino groups potentially have at their fingertips means that they can ensure that any cost-optimization opportunities highlighted by their benchmarking data does not negatively impact on the main pressure points for key customers highlighted by the customer database analysis. A spokesperson at the MGM Detroit has been quoted as saying, “we are at a better point than ever to evaluate what our customer demand is and normalize operations according to that demand.” It is an obvious point but worth emphasizing—knowing your customer is key. When the going gets tough customers will forgive you some indiscretions but not others. Casinos that will fare best in an economic slowdown will be those able to identify what key customer groups want and then deliver cost-optimization plans while reducing the pressure points that either will restrict customer traffic or negatively impact the essential elements of the customer experience. Although the large casino groups, or, if willing, the Provincial gaming authorities should have the advantage in this, it will depend on their ability to handle and process large quantities of information.
While the current economic climate is challenging for all businesses, there are opportunities for businesses to ameliorate its impact. As Thomas Edison said, “Opportunity is missed by most people because it is dressed in overalls and looks like work.”
By Tom Vandeloo, Simon Harding and Sean McGill, KPMG
The views and opinions expressed herein are those of the authors and do not necessarily represent the views and opinions of KPMG LLP. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.