A smile. Anticipation. Romance. Spontaneity. Excitement. Involuntary “mmmms” while enjoying a savory meal or a precocious glass of wine. Falling asleep at a pool in total relaxation. Sex. Beating your golf handicap. Laughing. Testing fate. Enjoying the warmth of friendship. The tactile sensory pleasure of a professional spa treatment. The exhilaration of winning. Unadulterated hedonism. Feeling reinvigorated, recharged. Oh wow! responses to just about anything.
What casinos ultimately sell and customers ultimately come to buy is emotion.
If a visit to a casino does not provoke and evoke emotion, then no value is created. Customers do not buy if the potential for emotion does not exist and/or do not return if none is created. If emotion is generated but the real or perceived value of the emotions created does not rise to the price or cost of obtaining it, then degrees of dissatisfaction result.
As the emotion value equals and then exceeds the price/cost, then repeat visits and ultimately loyalty are earned. The customer cannot be fooled; they vote with their pocketbook, and revenue ebbs and flows to those businesses that do the best in providing what consumers want, need and/or expect.
Create the Experience
Casinos gestate, manufacture and ultimately deliver emotion by creating experiences. In the broadest context, these are leisure experiences, both gaming and non-gaming.
As casinos have become larger and more diverse, today a patron will confront a multiplicity of activities and potentially hundreds of things to do that create experiences. Gaming may be the primary reason for the visit or any of the non-gaming activities might take that role, relegating gaming to a secondary motivation or even incidental reason for the trip.
Patrons measure their satisfaction with a visit to a casino based upon the net value of the contact they have with all of the space, employees and activities they encounter. The needs of the patron must be fulfilled, wants provided for; then, to the extent that expectations are equaled or exceeded, patronage and loyalty ensue.
While ideal, every contact does not have to be perfect. Contact with the priority activity must be close to perfect, and important adjunct activities must be very good as well. Contact with secondary and less-important activities can be less. For any given key activity, there is little room for error among attributes that are critical to the patron, but more room for error for those attributes that are not. Weighted by these concerns, things that go wrong must be overcome by things that go right—credits must exceed debits for the net leisure value to be positive and satisfaction to be the result.
Because casinos cater, sell and market to market segments consciously or by accident, a given activity will most likely be serving a number of different need, want and expectation sets (NWE) at one time—a different NWE set for each targeted market segment. Making things even more difficult, customers belong to multiple target market segments at one time and may shift from one to another from visit to visit and over time, leaving certain market segments and joining new ones. Thus, the NWEs of the collection of visitors can change from day to day and hour to hour with the change in visitor mix.
Getting product mix, production and delivery “right” so as to explicitly align to target market segments, evoke emotion and create leisure value is not an easy task, but it is one of the primary roles and responsibilities of the owners, their executive team, and the external resources (e.g., market researchers, architects, interior designers) they engage to assist them.
Free Time, Important Time
Gaming is a leisure activity, and it is important to realize that consumers only patronize leisure activities when they have free time and disposable income. As such, casinos are in a constant and intense free-for-all competition with other leisure activities for the customer’s free time and disposable income which, for some, are intrinsically equal if not more compelling than those provided by casinos.
Beneficially, however, gaming as the core adult activity is known to produce its own sense of raw enjoyment, quite capable of provoking and evoking emotion and leisure value all by itself. Consequently, as gaming has spread geographically over the last 70 years or so, gaming demand has increased proportionately. But besides quantity-driven growth, gaming and related non-gaming experiences have also improved quality-wise—further fueling and accelerating growth; penetrating traditional markets deeper and unlocking new ones.
The unprecedented growth of gaming over recent decades is testimony to the efficacy of casinos as a leisure-time pursuit. The industry has been doing a terrific job of expanding, improving, broadening and continually reinventing its product.
It may be said that casinos provide a greater array of indoor leisure activities in one place, under one roof, than anyone else in their leisure competitor-set. Indeed, some of the largest, most expensive, innovative and spectacular examples of restaurants, bars, lounges, showrooms, clubs, spas, pools, golf courses, retail shops and meeting/convention outlets are located at casino properties.
Likewise, some of the leisure industry’s most impressive “wow factors” can also be found at casinos. Movie stars and the world’s trend-setters go to casinos, books are written about them, and movies are made about them. Casinos have gone mainstream, and they are often the place to see and be seen.
So, the question to be asked is: What is left to be done? What are the opportunities? They are many.
Rating the Experience
Using a 10-point leisure value scale as a point of reference, the successes of the 9s and 10s should be applauded for doing a great job. They should be emulated and serve as aspirational benchmarks for everyone else. Be aware that these are not all five-star properties; nor are they found in any one venue. They don’t need to be big.
Rather, the properties in this category are those that deliver the promise of the positioning they have taken, i.e., delivering world-class experiences relative to their peer group, wherever that might be, along the one-to-five-star value chain commonly used to rank hospitality properties. Properties in this classification have little to no work to do to improve their leisure value. We can only hope for the good of the industry that they continue to keep up, improve and reproduce their model as often as possible through new properties.
The first-order opportunity both in number of properties involved and the room to improve is found “in the middle”—those properties that would be rated 3 through 8 on the leisure value scale. The middle comprises two major sub-categories. The first are the “partial successes.” As the name implies, these are the properties that are only partially successful in generating leisure value.
The second category consists of those properties that are “nice,” i.e., existing properties that have been renovated with fresh paint and new carpet and possibly have added a new “this” or a new “that,” but in sum do not evoke emotion. They are just nice, little more.
“Me Too” properties may be found in this category as well: new properties that admittedly are new, but merely mimic what has been done already with “new” materials, designs, colors and finishes, only this time without flair and panache—just replicas that do not inspire or bring anything really new to the marketplace. These properties add supply but do not create new demand. They are parasitic by degree, and therefore dilutive, not accretive.
By definition, the middle is not serving the gap between its rating and the maximum possible score of 10. This may mean failing to meet or exceed the needs, wants and expectations of 20 percent to 70 percent of their visitors. Or, it may mean they are producing experiences for each customer, 20 percent to 70 percent of which is unsatisfying. These amounts represent those who are being disappointed at levels sufficient to disenfranchise them.
On the upside, these numbers also represent the opportunity to regain the customer’s patronage, secure a greater share of wallet, increase repeat business and engender potential loyalty. The opportunity to fix these deficiencies was often not recognized in the heady halcyon days leading up to the financial crisis, because visitors were in sufficient number to keep moving around trying to find the property that served them better and, in any case, were replaced by a steady supply of new visitors who were taking their first trip in ignorance, not knowing any better.
The same opportunities are created by 1s and 2s, except even more so. But, in this case these properties may be thought of as outright failures, not properties that need improvement. Many of the 1- and 2-rated properties were simply developed spending the least amount of money possible in order to opportunistically taking full advantage of demand exceeding supply, and tapping the raw drawing power of casino gaming without bringing any additional value in the process. Opportunity abounds in this category.
The second-order opportunity deals with the opportunity for some and the necessity for others to improve the financial dynamics that affect the production and delivery of the product, and thereby profits. The gaming industry has always been a labor and capital-intensive industry which, when revenue is beyond the break-even point, creates favorable operating leverage conditions. A “bigger and more expensive” development philosophy… plus increased land and construction costs… plus willingness and ability to increase debt-to-equity ratios… plus more debt load put on those companies taken private in a rash of buyouts… all combined and conspired to raised the level of fixed costs and impact the expense curve.
At the onset of the financial crisis, the result was that the break-even point had never been higher and the expense curve never steeper, reducing the margin for error to its lowest point.
When revenues dropped, profits did not just decrease linearly. Reverse operating leverage caused profits to reduce in a greater than one-to-one ratio to loss in revenue, driving many to actual losses. This condition suggests that fixed and operating costs are not right-sized to current conditions, current leisure value. They need to be reset. And it also suggests the necessity of building more flexibility into the financial structure so the industry can react to revenue drops more effectively.
The third-order opportunity is one of opportunity cost, i.e., what is the cost of doing nothing and/or waiting too long to do something to accelerate and finally exit the hardship period? No doubt the world and domestic economies are still sending mixed signals about whether the rebound can be sustained, much less accelerated. But there are enough positive signals to suggest that if the casino industry waits to be pulled out of the financial crisis solely by improving external economic conditions, it may lose the opportunity to accelerate the final stages of the rebound and perhaps exit at a higher performance level than would occur if nothing is done.
The fourth-order opportunity is another form of opportunity cost: positioning the industry now to deal with possible “new normal” scenarios that will be the operating environment when economic hardship ends and real growth can begin. In this regard, the reset level of demand may be lower than peak 2007 levels, and the structure/dynamics of that demand may be different as well. It is a mistake to believe the industry can exit the financial crisis and reinitialize consistent growth by continuing to do business as usual. Not preparing and positioning the product today for a different tomorrow runs the risk of incurring another opportunity cost.
In all, there are a number of reasons to suggest it may be time to end reactive, survival and cost-cutting mode and re-enter the proactive, building and growth mode. The casino industry is entering a decision period, admittedly the beginning of which may be “too soon” but, in kind, the end may be “too late.” The decision is to thank the financiers and metricians for their invaluable contribution to save the industry, but to retake the industry from them, allowing the owners and executives to focus once again on the raison d’être of the industry: to proactively produce leisure experiences that have real, current-day leisure value. A case can be made that for some, the time for this shift is now, and for the rest will be soon.
So What Now?
The remaining question is: How?
What needs to be done will not be easy, requiring some combination of bravado and sacrifice. The benefits of taking action must be weighed against the cost of waiting longer and doing nothing—not an easy bet to handicap. When the decision is made to take action, the business plan must be developed on a case-by-case basis, but be structured around the following objectives:
• Refocus Decision Making: Dramatically and fully move from reactive, survival mode to proactive growth mode, recalibrating the company/property paradigm to a 100 percent commitment to creating leisure value. Then build a culture, team, decision process, organization and infrastructure capable of delivering it.
• Fix the Product: Take a zero-based approach to review, refine and/or change the product concept, production, delivery and consumption elements so they align to explicitly targeted market segments. Raise the standard to 7 or above for existing properties and settle only for a 9 or 10 for new properties.
• Develop a Deeper and Broader Product Development Resource Pool: Find and nurture more internal and external creative product development talent (geniuses?) who get what creating leisure value is all about, and then assist with the development of the talent. Get those who can or will only do “nice” and “me too” out of the room.
• Align the Financial Structure: Iterate and right-size operating and marketing expenses in a manner that optimizes revenue and EBITDA. In parallel, cross-iterate and right-size the balance sheet to the EBITDA potential and real, current-day and future leisure value. Build in flexibility to react to unexpected forces and provide for an adequate margin of error.
• Prune Portfolios: Tighten up property portfolios so they include only those properties that share common strategic imperatives to allow the company to focus and be efficient. Sell those that do not. Acquire and/or build more properties that do.
• Convince Financiers to Participate: Demonstrate to third-party financiers the efficacy of the business plan, its risk and upside potential. Agree to immediately shift from a “survive” to a “build-and-grow” mentality. Work together and share sacrifices (write-downs and write-offs) to accelerate the recovery and be better positioned for tomorrow. Share the rewards that follow.
• Embed Monitoring and Measurement Programs: Monitor and track everything, causes and results. Learn, fix, improve and grow from this information.
For the sake of the industry, the hope must be that properties, companies and financiers will make total, comprehensive, manic, compulsive commitments to this approach. In this way, conditions will be reset to enable the production of leisure experiences at a price/cost which generates real leisure value independently and relative to other non-gaming competitors in the fight for the public’s leisure time and disposable dollar in the rebound and new-normal economies.
Those that do will be rewarded. Those that do not may wallow too long in an out-of-date mindset constrained by the unfulfilled opportunities, mistakes and the excesses of the past.