Imagine running a multibillion-dollar business without a budget. For decades, Nevada’s casinos did just that.
From the 1950s into the 1980s, the gaming halls were run by guys with names like “Bugsy,” “Lefty,” “Joe Batters” and “Momo.” Dealing in cash enabled the bada-bing crowd to skim the receipts and render less unto Caesar?in this case, the Internal Revenue Service.
And boy, did they rake it in. According to the Las Vegas Mob Museum, which celebrates Sin City’s mobbed-up past, the skim at the Stardust amounted to about $7 million per year, and the count room at the Tropicana gave up an average $150,000 per month.
Then the FBI cracked down, the wise guys died off or retired, casinos went corporate, and many became publicly held. In 1978, when gaming came to New Jersey, then-Governor Brendan Byrne famously told the mob to “keep your filthy hands off Atlantic City.” That state’s strict regulatory system became the industry standard and Nevada quickly followed suit.
Enter the Bean Counters
“The industry grew up,” says Dean Macomber, gaming consultant and president of Macomber International Inc. “In the ’80s and ’90s, we become a measured industry, getting into metric-based operations, total quality management, ISO standards, kaizen management principles we took from Japan, reinforced behavior?budgeting went beyond things with a dollar sign into a whole performance system.”
Swimming in data, charged with meeting or surpassing day-to-day averages and annual revenue projections, department heads learned to match top-line revenues to bottom-line growth. And for many years more, it was still easy to come up aces. It seems quaint now to observe that during the recession of 1980, Vegas actually worried about competition from Atlantic City.
In retrospect, that recession (with a small “r”) was minor compared to the sledgehammer that hit in 2007. Five years in, though the Great Recession is now officially over, it hasn’t fully released its grip on the global economy. Along with widespread and ever-growing competition, it has made effective budgeting even more important in the casino industry.
“When the financial crisis struck, everything got blown up into the air like a World War II movie, then reassembled like a Transformers movie,” says Macomber. “People realized they had to cut costs because revenue was going down, whether they wanted it to or not. One could argue that the budgeting process became a survival process?not done once a year but sometimes once a quarter, once a month, once every half-month. Because cutting costs meant survival.”
As the economy edges toward recovery, some casinos remain in survival mode, as witnessed by Atlantic City, where year-over-year revenues continue to cascade and gaming halls once valued in the hundreds of millions are selling for pennies on the dollar. Trump Plaza, for one, which cost $214 million to build in the early 1980s, sold for just $20 million in February (currently on hold).
No Brag, Just Fact
For a budget to work these days, it has to start with a measurable goal based on an accurate assessment of the marketplace. It is less a fixed directive than a yardstick of past and present performance, a tool to develop effective marketing strategy and tactics, and a guide that enables companies to develop achievable expectations for the year to come. Most of all, it must be based on the truth, and nothing but the truth.
George Haldeman, founder of Strategic Gaming Advisors in Las Vegas, recently consulted with a bankrupt casino whose owners developed a budget based on equal parts optimism and denial. Instead of a management tool, it read like a wish list.
“They did a budget that showed they were going to be able to cover their debt payments, but it wasn’t realistic?it called for much higher spending levels in an attempt to get unrealistic revenue,” says Haldeman. “We still benchmarked against that budget, but we explained to the bankers?who essentially were in control of the property at the time?that it wasn’t going to drive our decisions.”
Though the property started out on tenuous footing, the right strategy led to an acceptable outcome. “We went on a year-over-year basis, 2012 compared to 2011, and increased profits by $6 million on $1 million less in revenue by extracting $7 million in costs out of the business,” says Haldeman. “If we had followed the owners’ budget, it would have been a financial disaster.” That property has since emerged from bankruptcy, and with a budget based on reality, “they are actually ahead of expectations through May.”
Prior to setting its budget, a casino should identify its strategic position in the market in relation to its competitors, and the customer demographic it hopes to attract and retain.
“That’s my No. 1 rule of thumb for budgeting,” says Cory Morowitz, of Morowitz Gaming Advisors outside Atlantic City. “After you understand your market, you can put what I call a chain of activities in place to service that market and differentiate yourself from the competition. Then you build a budget around that chain to support your strategic positioning. If you follow that process, it’s a good start.”
Say a casino in a highly competitive market wants to be tops in slots. Its chain of activities will include everything that supports that end: an effective marketing campaign, a compelling loyalty program, a good mix of machines, as well as enough slot hosts and food and beverage outlets to serve its target demographic.
If the same casino doesn’t stake out its position and do so decisively, it can end up diluting its message, casting its net too wide, yet still fall short of planned profit margins. It may spend more on promotions to drive bodies in the door, but if those promotions attract low-end play, revenues will suffer. And low-end play still has to be serviced, Morowitz observes, which adds labor costs.
Operators in a less competitive or monopolistic market can minimize their marketing and labor costs?the two biggest expenditures outside gaming taxes?without a negative impact on revenue. “If I don’t have to differentiate myself, I can staff up my cage a little less and my food and beverage outlets a little less,” says Morowitz. “I can let people wait seven minutes instead of four minutes for service. It’s really recognizing the marketplace you’re in.”
Cost Cuts and Shortcuts
In 2006, Kentucky hotel company Columbia Sussex acquired Aztar Corp., the owner of the Tropicana casinos in Las Vegas and Atlantic City. At the time, CEO William Yung issued a fulsome statement calling it “a breakthrough for our company which will significantly enhance our gaming assets in key growth markets and strengthen our position as one of the leading owners, developers and operators of hotels, resorts and casinos.”
In less than two years, amid draconian staff cuts that led to complaints of substandard service, Columbia Sussex got the boot, and the New Jersey Casino Control Commission appointed a trustee to run the Atlantic City Trop.
The hotelier was kicked out in part because it failed to establish an independent audit committee, but what the public remembered were lurid headlines about bedbugs and squalid bathrooms. Yung defended the mass layoffs?under his brief tenure, about 1,000 people lost their jobs?as a way to rein in costs in the face of new slots competition.
It’s an extreme example, but any cost-cutting measure that negatively affects the guest experience probably is not worth the savings. But some labor-saving strategies?many that resulted from new technologies?have turned out to be winners both for the properties and their best customers.
In years past, for instance, some casino operators were slow to warm to cashless slot machines, fearing players would miss the thrill of scooping up buckets of quarters. Those fears were unfounded, says Morowitz, who cites the Pareto Principle (the “80-20 rule”) as one reason why.
“In gaming, normally 80 percent of slot revenue is driven by 20 percent of customers. They come a lot, they play at high levels and they play for long periods of time. Anything that minimizes distractions and allows them to keep doing what they want to do?to play?is good. These new technologies mean less human interaction, but they allow people to stay on the device longer.”
Micro vs. Macro
For some tribal casinos, like the Potawatomi Bingo Casino in Milwaukee, the budget is driven by the need for cash flow, says Chief Financial Officer Rodney Ferguson, a veteran of both commercial and Indian gaming. From a projected revenue figure, expenses and capital expenditures are subtracted; what’s left must be enough to support the tribal membership and run the government of a self-sustaining sovereign nation.
Though Potawatomi enjoys a relative monopoly in its region, profitability can be affected by forces as significant as an economic downturn or as relatively minor as a spike in gas prices or even the weather. Ferguson takes a zero-based approach, justifying every dollar of revenue and every expense, down to the number of pens and pencils. But his budget process is “a barometer and a starting point,” part of an overall strategic plan that optimally positions the property for growth over a number of years. And he revisits the budget on a monthly basis according to inevitable fluctuations.
“Let’s say you budget a $5 million profit for the month and trends are showing you’re going to be 5 percent short. So going forward you have to say, ‘Well, we don’t think we’ll be able to meet those original budget numbers, and we can expect a 5 percent decline for the rest of the year if things stay the same.'”
If shortfalls are expected, Ferguson looks to the two largest departments, payroll and marketing, for savings. “My philosophy is if payroll is too high, reduce it through attrition because every casino and every business has turnover, and if you can get your numbers down that way you don’t put individuals out of work. From a marketing standpoint, cut down on the billboards or the TV and radio commercials—just do the ones that are really important. Use more of a tactical approach to get the information out.”
That can include replacing direct mail with digital outlets to communicate with the customer base. “The trend now is to capture as many email addresses as possible, doing the email blasts and the Facebooks to reach players and guests instantaneously. It’s saved a lot of dollars.”
He also doesn’t try to save on payouts. “The guests who come here on a regular basis know whether the machines are tighter or not. The goal is to have high utilization of machines so jackpots are paid out more frequently and guests feel they’re getting a good bang for their buck. They know for sure if there’s been some tweaking.”
One area is sacrosanct in Ferguson’s view: “In general, don’t eliminate or have staffing levels go down to where you have an effect on service. Guest services is probably the most important piece of your business; you have to have to make sure folks still come back to your property. If they have choices, they might just go somewhere else.”
At the Motor City Hotel Casino?one of three casinos that regularly battle for primacy within a 1.5-mile radius in Detroit?one seemingly modest technological development has led to meaningful savings with no downside for the casino or its clientele.
Motor City created its own brand of self-serve kiosks for the property’s restaurants, enabling customers to bypass the cashier and pay for dinner with a club card, credit card or cash. Chief Financial Officer Bruce Dall does the math: “If I add them up, that’s four outlets times two shifts; cashiers in Detroit make $19 an hour with benefits, for about $50,000, so if we reduce our staff by eight people it probably saved us $400,000 a year.”
But Dall views cost efficiencies like this as a function of everyday business?”It should be regular and ongoing”?and annual budgeting not as gospel but as guide. “Being a CPA, I don’t find budgets very useful in today’s world,” Dall says. “They’ve become a numbers game with operators guessing where their revenues are going to end up.”
For proof, he looks to recent history. “Just look at what happened in late 2008. When you got to September or October 2009, were those numbers even close to what they expected? We do a formal budget, but my preference is to look at it as an opportunity to think strategically: where we’re going, what we’re doing, what we can think of to change, how we can utilize our resources to improve customer service, and how that will impact the numbers. Does it really matter how much toilet paper we’re going to use or how much chicken we’re going to fry up?”
The finance team spends a lot more time on the capital side. Over the past five years, even as the economy faltered, Motor City expanded its gaming space and invested $330 million to add a hotel theater. It continues to freshen up with periodic and cost-efficient re-designs, which can be as simple as moving a pit, adding a cage or rearranging the furniture. “You can do it without spending a boatload of money,” says Dall. “The budget process should be strategic and capital-oriented rather than combing through the numbers to find minor savings here and there. You should be doing that every day, not once a year.”
The company also looks for innovative ways to trim expenses, boost revenue and increase customer loyalty. One novel idea has managed to accomplish all three. Last year, says Dall, Motor City CEO Gregg Solomon announced that he wanted to make the property’s Reward Play program “as irrelevant as possible” and so reduce the marketing dependency on free slot play. The result was a new rewards program that allows customers to redeem rewards toward a lease or purchase of a new Chrysler, Ford, or GM?stalwarts of Detroit manufacturing.
“We have over 100 customers driving cars on us,” says Dall. “Now that’s strategic thinking. And yes, it fits our brand perfectly.”
Advance or Retreat
Strategic thinking will be even more essential as the industry continues to expand. Casino marketing expert Steve Karoul was CEO of Foxwoods in Connecticut when its primacy in the market was challenged by competition.
“Foxwoods was the largest and Mohegan Sun was second or third largest (in the Northeastern U.S.) when all of sudden Pennsylvania cropped up on the landscape,” he says. “Rhode Island just legalized table games, and Massachusetts has passed a referendum that will legalize casinos. You have Aqueduct in New York, which made $70 million in slot revenue (now $1 billion), and all that money or a good portion of it was siphoned off from Foxwoods and Mohegan Sun… It’s not going to get any easier with online gaming, and lotteries are another challenge that will siphon off money from casinos.”
In Karoul’s view, in the midst of expansion in the industry, some retraction may be in order. “It’s a very risky situation for a lot of casinos today, because a lot of these companies and tribes really don’t do a proper feasibility study and impact analysis about where the future competition is going to come from. What happens when a new casino opens up across the state line?”
In that case, he says, “Maybe they don’t need a $700 million casino. Maybe they need a $200 million glorified slot operation.”