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Marketing in Troubled Times

How gaming's growth-and decline-is tied to the global economy

As I write this article, the stock market is in the midst of its eighth straight day of decline—and trillions of dollars of our wealth continue to be whittled away. It certainly is a frightening prospect. Who would have ever thought we would be making comparisons to the Great Depression?
There is no question that the bear market has impacted our industry, and in a meaningful way. Gaming stocks that were market leaders just a year ago have fallen 70 percent and more. Private equity deals that looked like no-brainers in February look like disasters today. Bankruptcies are starting. New properties are being stopped midstream. And expansions are being canceled.
So what happened? How did an industry that so many said was “recession-proof” end up in its biggest recession ever?
I think we can explain this predicament—and what to do about it—by viewing the development of gaming as a sequence of eras, each of which has been defined by certain views of capital deployment, bricks and mortar, and marketing. I would note that different markets are in different places along this continuum, so as you read, consider which might apply to you.
As gaming is legalized in a particular jurisdiction, it enters the first era, that of “constrained supply.” During this period, the race is on just to get a property open. It doesn’t much matter the quality of the bricks and mortar, the location or even the marketing. The simple product of a casino—slots and table games—is so compelling that customers will go through severe inconveniences, wait in lines, and sometimes even pay entry fees just to gain access to the product.
Twenty years ago, when gaming was legal only in Las Vegas and Atlantic City, properties were far less luxurious. They were gambling factories, grind joints that operated on a “key” marketing strategy: they unlocked the doors and made money. Since folks in Los Angeles or New York only had these options to legally gamble, they would drive hours, and stay in dark and musty rooms in order to gain access to the product.
Think to the opening of the riverboat markets in the 1990s. Initial riverboats were just that: refurbished, multi-level, former passenger and transportation vehicles that were redone for casino gaming. And at first, they did just fine. Customers in Midwestern cities were so happy to have the product available, they flocked to these facilities.
The second era, that of the “bricks-and-mortar arms race,” starts when operators realize that they have a substantial amount of competition in a market, and that the better facility can stand out in the marketplace. Often, these are not first-movers, but second- or later-movers who come to dominate the marketplace. The Mirage’s 1989 launch or the Borgata five years ago are great examples of this. Ameristar’s Midwestern properties raised the bar in Missouri and Iowa, blowing away the first-era properties that had inhabited the market.
And it is with our examination of this era that we can begin to tie things back to our current economic morass. These new properties were almost always financed by low-interest, easy credit from Wall Street. Moreover, operator performance tends to be evaluated by EBITDA, which is a measurement of current operating income but does not incorporate the amount spent on capital improvements. Many companies fell into a trap of using easy credit to build lavish properties to marginally improve EBITDA.
And so we entered an arms race, where new restaurant after new hotel tower after new convention center blossomed. So long as the economy was artificially performing—based on unsustainable increases in housing prices and more of that easy credit—the hotel rooms filled, the restaurants were packed and all looked right in the world.
But eventually these markets become oversaturated—too many properties, and too many nice properties at that. Results stagnate, capital dries up, projects get canceled. Sound familiar?
Thus begins the third era in gaming development: the “era of optimization.” In this period, we have what we have, and performance improvements are no longer capital-based, but built on fundamental efficiency improvements.
In this era, we improve performance in one of two ways: either we cut costs, or we increase revenue. But based on what I have seen over the past six years in this industry, most operators are very good at operating cost-efficiently. In good times and bad, GMs have been trained well to keep staff low and watch operating performance. So, for better or worse, at most properties, cost-cutting isn’t much of an option.
This means the era of optimization really ends up being an era of marketing, where the smart operator looks for the right combination of relationship marketing strategies to maximize the value of its database. In this world, operators compete with each other for market share, and at the end of the day, all too often, one operator’s success is another’s loss.
But the good news is that not all operators are going to effectively learn to market their properties, and so those that do will have substantial upside to claim.
The only meaningful strategy to win in this current environment is marketing. How we do that—the strategies and tactics that will work in this ever-changing world—will be the subject of my next column.
Randy Fine is managing director of the Fine Point Group and one of the world’s foremost experts in customer relationship marketing and gaming strategy and execution. Prior to founding Fine Point, he served as both vice president of Total Rewards and product marketing and vice president of slots and Total Rewards operations at Harrah’s Entertainment.