Temporary downturns in the casino’s live-game or slot hold percentage do not constitute the occurrence of a distressed or turnaround situation.
Since casino revenue is based on games of chance, these outcomes are subject to normal positive and negative fluctuations. In many instances management overreacts to the dreaded, but still normal, downward swings and actually creates negative situations due to their overreactions.
Downward financial trends are usually brought on by an assortment of maladies resulting from a combination of factors, such as a consistent drop in revenue and an increase in costs, because of market changes and poor decision-making policies.
Identifying a Distressed Situation and Establishing a Turnaround Process
For a number of reasons, a casino operation can find itself suffering from declining profits that put it into a distressed position. This situation can be the result of continual revenue losses over an extended period of time or from a sharp downturn in profits during a recent, but relatively short, business cycle. A decline in profits can be attributed to any number of business and financial reasons resulting from factors both external and internal to the gaming operation. If the decline in profit is too great, cash flow dries up and the business becomes insolvent.
Several years ago I took over as interim general manager at a northern California card room whose business had become distressed. The card room had suffered from several different problems, which, over a three-year period, placed the operation on the doorsteps of closure and liquidation.
Internal factors ranged from poor management to corruption involving wasteful promotions, fraudulent cash disbursements, and improper hiring practices; external factors included a new no-smoking law and the overbuilding of card rooms in the San Francisco Bay area. Through the implementation of drastic cuts in unnecessary spending, the re-evaluation and overhaul of several marketing programs, and the termination of the previous management team, the card room continued to remain open for business while avoiding a trip to bankruptcy court.
External factors for poor profit performance may result from economic shifts in the immediate market base, competition, and nationwide changes in consumer economic-confidence levels. In order to cope with these shifts, the casino operation needs to be prepared to react in kind. In some situations, organizations that hesitate to take action and put off their decision-making will find themselves behind the 8-ball, unable to adjust to the problems in a timely manner.
Internal factors usually involve management’s inability to operate the casino in a profitable manner or inadequate cash flow; each usually exacerbates the other. In many situations, upper management doesn’t possess the operational ability to cope with problems, and actually creates additional problems though improper analysis and poor decision-making skills.
Although internal factors are easier to correct than external factors, management sometimes insists on following obsolete programs and/or stands behind faulty decisions until it’s too late to make the necessary corrections.
The primary objective for an organization during a turnaround situation is to conduct a concerted effort to stop the decline of profits and re-establish key business competencies that give the casino operation a competitive advantage. In order to accomplish the complete turnaround of an operation, management needs to begin a thorough reorganization known as “retrenchment.” Retrenchment allows the gaming operation to gain new strength from the streamlining of its operation and the elimination of waste. Retrenchment utilizes two primary methods of operational modification:
• Cost reduction-decreasing the workforce through attrition and, in the extreme, layoffs. Elimination of elaborate and ineffective promotional activities and moving away from marketing to customers who provide a low margin of return.
• Asset reduction-selling non-essential property, terminating low-profit contracts and leases, selling underutilized devices and equipment, and eliminating perks, such as executive expense accounts and executive leased automobiles.
Probably the most important element of a successful turnaround strategy is relative to upper management’s business-making ability. Several business research groups have attributed the primary factor for a successful turnaround to the replacement of key management personnel. The introduction of new management-executives who have a successful industry track record, especially with turnaround situations-provides the organization with a new and different perspective on the existing business situation.
New management teams have the advantage of getting a fresh look at the situation prior to developing a turnaround strategy. This perspective affords them the ability to facilitate drastic changes to existing business plans and previously established budgets and, in most cases, to raise employee morale by projecting a clearer picture of business recovery.
When several gaming executives and I took over the failing Aladdin Hotel-Casino in the early 1990s, we had our hands full. The casino had been in bankruptcy for several years and we were faced with not only poor cash flow, but also an aging property that needed an injection of money to bring it up to standards. All expenditures were analyzed and prioritized, mostly involving structural problems. Because of our situation and limited bankroll, not one penny could be spent unnecessarily on other areas, such as elaborate promotions or extensive advertising schemes.
It was at this point that we concentrated our attention on the only asset we had that could give use some competitive parity or possible advantage: our employees. We took great strides to increase customer service and understood the importance of what our customers meant to our turnaround strategy. We also worked hard to improve morale and provide the employees with a good working environment. Good personalities were rewarded, while poor personalities were sent looking for work elsewhere.
Sometimes the greatest obstacles to overcome are defeatist attitudes bred through continuing condescension of management toward employees. Negative attitudes only speed up the distressed property’s path to bankruptcy and liquidation.
Strategy for a Successful Turnaround Process
The main goal of the turnaround process is to achieve financial stability for your operation. In some situations, the need for financial stability is so immediate that failing to do so will drive the gaming operation out of business. The more severe the financial situation, the more drastic the retrenchment process becomes. Once the business situation has been properly analyzed and retrenchment strategies have been established, it shouldn’t be long before financial stability is reached. Total recovery then follows. It’s at this point that management has the ability to re-examine the gaming business, exploiting the core value strengths and capitalizing on market opportunities.
Some of the key points of the turnaround process are as follows:
• Properly identify the cause and severity of the turnaround situation. Some situations may require the examination of inadequacies involving internal issues while other situations will require the consideration of both internal and external factors.
• The severity of the situation is an important governing factor in estimating the speed with which retrenchment response is formulated. When the financial situation is high in severity, there’s an urgency to increase cash flow in order to keep the operation away from reorganization and/or bankruptcy.
• The recovery phase of any turnaround strategy needs to be anchored on a solid retrenchment plan that will halt a decline in profits and achieve financial stability in the near term. This is the point where the turnaround goes from a strategy plan to an action plan.
• A retrenchment strategy primarily involves cost reduction. The reduction of unnecessary costs, such as ineffective casino promotions, overtime expense due to poor employee scheduling, and inadequately structured comp policies, will provide sufficient cash flow for the operation when the severity of the distress is low.
• Turnaround strategies that eliminate costs present an immediate return to the operation’s bottom line, while strategies to increase revenue tend to return bottom-line cash flows farther down the road and may place a greater strain on the operation during the period of distress. It’s widely known in the business world that you cannot spend your way out of dire financial straits.
• When more extreme situations occur, retrenchment will also involve the reduction of operational assets. Asset reduction will provide the operation with an influx of cash from the sale or elimination of the assets, such as unused land and structures, unproductive gaming devices and equipment, and participation contracts that redirect earnings away from the operation.
• Asset reduction is used in conjunction with cost reduction when cost reduction alone will not provide the operation with the necessary cash flow to stay solvent. It goes without saying that asset reduction is considered an extreme business-recovery measure.
• Once financial stability is achieved, the next step is business recovery. Total business recovery is achieved when economic measures indicate the casino operation has regained its pre-downturn levels of performance.
• The recovery phase of the turnaround process becomes the starting block for successful future operations. Management needs to develop a “going-forward” strategy that will concentrate on the efficiency of the business.
• The next step is to position your organization in the market so that it takes advantage of one or more of its core values. This core value can result from your property’s market uniqueness, its ability to cater to a specific market niche, or from the strength and experience of your new management team.
Steps Toward a Successful Turnaround
Here are some steps our management team, JMJ Inc., used at the Aladdin Hotel-Casino in the mid-’90s to help turn around the previously bankrupted and extremely tired property:
• Analyzed the business’ financial reports and chopped any expense not essential to the operation. We found waste in executive perks, overtime costs created by poor scheduling, over-comping casino customers, and unnecessary entertainment and participation agreements. The elimination of these costs freed up revenues and increased cash flow immediately.
• Discontinued all promotions until we estimated their cost and potential for return. Many management teams throw more money at attracting customers when revenue starts to slide, and these “emergency” promotions are usually a huge waste of money. If it didn’t pencil out, we got rid of it.
• Whenever possible, we stayed away from laying off employees. Layoffs and terminations, especially if they’re done over an elongated period of time, create morale problems, which you may not be able to rectify later. We allowed natural attrition to lower the staffing levels to a point where they became effective within a workable period of time. If layoffs were necessary, we were sure they were all done in the shortest time span possible (one day is best). We didn’t leave our employees waiting in agony for the other shoe to fall.
• Encouraged employees to think in terms of success instead of failure. We focused on positive customer service and customer relations before spending resources on marketing and advertising. We knew that any money spent on bringing in new business would be wasted if our frontline employees were not providing above-average customer service.
• We needed to spend money immediately on capital expenditures. Failing properties tend to sacrifice needed “cap-ex” spending as cash flows diminish. Many areas of the facility needed immediate attention in order to keep the business in operation.
Bill Zender is a former casino employee and president of Last Resort Consulting. This article is an excerpt from his new book, Casino-ology, published by Huntington Press.