Nearly seven million victims worldwide have died as a result of the recent pandemic. Probably like you, I lost more than one good friend in the gaming world to that horrific plague. From that perspective, there was absolutely nothing “good” about COVID and its toll. However, in recovery, we have adopted some valuable business lessons. Some of those are good, and I consider others bad.
Several years back, when I was considering hanging out my shingle as a gaming consultant, I searched the web for a logo that would illustrate my mission. When I saw the graphic above, I immediately purchased the rights and have used it ever since. While it isn’t obvious to everyone, I figured that if anyone didn’t understand the “Return on Investment” acronym, they probably wouldn’t appreciate my advice anyway.
Investopedia quotes this simple ROI definition: “Basically, Return On Investment tells you how much money you’ve made (or lost) on an investment or project after accounting for its cost.”
However, I’ve learned that not everyone sees that concept as I imagined. My purpose was to help casino operators make practical decisions, based on experience, past mistakes, advanced analytics and common sense that would help them achieve the highest, most sensible profitability over the long term.
But like most things in life, moderation is the key. Overuse of nearly anything, including ROI, can cause harm (need I mention desserts, adult beverages, online shopping and just about everything that’s fun?).
Maximizing ROI is foundational, but it is also a fragile thing and can’t be simplified. Here’s some more from Investopedia: “ROI can be used in conjunction with the rate of return (RoR), which takes into account a project’s time frame.”
A good example is my “prime directive” that I’ve written about for years: “Thou shall NOT tighten the slots more than is reasonable to ensure an enjoyable guest experience and to encourage repeat visits over time.” I won’t rehash that discussion today, as it will send some Las Vegas-based academics into a tizzy. But few disagree that if you were to immediately crank the slot hold to the legal max of 15% or 20%, you would see a wonderful increase in ROI in the short term. Stockholders would celebrate. Given a bit more time, you (and they) would go broke.
With a promise to not comment further on raising hold percentages, high resort fees or paid parking, the pandemic has produced some much-needed attention and critical new data in several other operational areas: F&B, Hotel Operations, Maintenance, Entertainment, Bingo and Slot Inventories.
Let’s begin with that last topic. The 2020 closures and subsequent limited re-openings gave analysts an opportunity to examine the impact of these changes. It has always been a “Slots 101” basic to remove weak machines and add strong machines. But many researchers, including ReelMetrics, based in the Netherlands, made strong cases based on their “before, during and after pandemic” comparisons that most slot floors suffered from severe “inventory overdiversification.” (Incidentally, they discuss this topic in a newly-launched podcast, “ReelCast”, that’s well worth a listen.)
Many operators heard them and reduced their quantities of weak machines substantially, finding strong results with fewer machines. But some overlooked an even more important factor that they emphasized about making sure you have enough strong machines, especially for players in the “Hosted” categories (your VIPs).
ReelMetrics CEO, Nick Hogan said, “It’s critical to look at the player data and understand who’s playing what, and your first order of business is to ensure that host-level players can get on their favorite titles. If they can’t, their wallets will shrink to the tune of 50-70%.” Don Retzlaff, who heads Professional Services at ReelMetrics, added, “When you see host-level favorites with the win at 4x or 5x floor and handle pulls showing mean occupancy at 85-90%, this is not a good thing. It means VIPs are not getting on their favorites during high-occupancy periods, you’re frustrating your best customers, and you’re leaving piles of money on the table. For these titles, target mean occupancy levels of roughly 65%, and you’ll be blown away by the results.”
These are solid examples of prudent analytics to both increase ROI and guest satisfaction at the same time. But that’s not always the case. The majority of casino buffets and bingo halls failed to reopen after the pandemic. ROI is the reason.
Bingo is revered in Indian Country since it laid the foundation for today’s Native American mega-resorts. In a few places, it is very successful. However, considered just as a standalone product, it has always been marginally profitable when contrasted to Slots (whether on a reservation or within a commercial casino). A few halls were either shrunk or eliminated before the pandemic, but that trend skyrocketed with the re-openings. The pandemic was the perfect cover to close for good. What may suffer most is the significant secondary play on slots, F&B and other products from the missing Bingo crowd.
Likewise, buffets have suffered a similar fate. Even when the price of breakfast exceeds $35, these food outlets have always been marginally profitable. They are labor intensive and have a high “food waste” factor. The ROI was low.
But remember the comments from ReelMetrics about “occupancy levels”? When was the last time before the pandemic that you saw a buffet or a bingo hall that wasn’t full? Think about that. Customers love ‘em. Their elimination will most certainly have an impact on many who are making a future “entertainment” choice.
Quick Custom Intelligence (QCI) founders Andrew Cardno and Ralph Thomas, respected gaming analysts, make similar arguments on the complexity of ROI mathematics in the new Third Edition of their book, “The Math That Gaming Made”: “The various (casino) revenue streams do not exist in isolation. Instead, certain streams serve to support others. In heavily competitive environments, companies have even resorted to loss leaders – for example, a buffet that loses money, but is a great marketing tool for driving incremental gaming revenues.”
I promised to not mention resort fees and paid parking again, but what about live entertainment ticket prices? While not necessarily pandemic induced (or confined to just casinos), concert ticket prices are becoming ridiculous. In their August 2nd issue, Rolling Stone noted, “Adele fans looking to buy tickets for her rescheduled Las Vegas residency on StubHub saw seats starting at $670 for nosebleeds and capping out at $40,000 for the front row.”
I like Adele, but not sure I’d trade my pickup truck for a single primo seat! That travesty has been fueled by scalpers, but mostly by the near-monopoly of Live Nation and Ticketmaster engaging and encouraging a practice that is flourishing post-pandemic known as “gouging,” or “whatever the market will bear.”
It appears the same is occurring with hotel rooms. The LVCVA (Las Vegas Convention and Visitors Authority) recently reported, “Visitors to Las Vegas paid the highest room rates in history during the month of September.” Tourism executives seemed jubilant about the news. They loved that they were joining the likes of San Francisco and Los Angeles. Really?
Rates were 20.1% higher than they were in 2021 and 36.5% higher than September 2019 before the pandemic. Visitors are already seeing record high gas and airline ticket prices this fall just to make it to Vegas, but hotel rates may soar even higher than the new September record. A survey by Hotels.com for the third weekend in October showed: “The Cosmopolitan of Las Vegas, $740 a night; Caesars Palace, $749; Delano Las Vegas, $929; Wynn Las Vegas and Encore, $1,034 each; and $1,099 for a room at Four Seasons”. While that’s fabulous for ROI, do you think it will go totally unnoticed by visitors?
There are a few good things happening on the hotel scene post-pandemic, but they’re hard to notice in the face of these escalating rates. Daily maid service has been limited (saving water, supplies and labor) and cleanliness (both in the rooms and on the casino floor) has never been better. Likewise, new marketing data tools like QCI are making sure the right players are in the right rooms. I believe these small changes (unlike resort fees and high room rates) will have minimal impact on visitation levels.
Justifiably, operators have seen increases in their labor costs, utilities, fuel and supplies like everyone else; but it is doubtful if those totaled anywhere near the percentage price hikes they are now dumping directly on Las Vegas consumers.
One corollary of ROI is higher rates of returns and increased profitability. It is probably at the root of the problem. It is caused by the constant corporate demand for higher stock prices every quarter with little regard for the future. Overall, MGM Resorts, largely from increased Strip revenues, generated $3.4 billion in the third quarter. That’s a 26% increase over 2021. When that can be done without negatively impacting guest satisfaction, it’s a win/win.
However, while many of the items cited above are wins for the casino, most of them also represent losses of enjoyment, value and satisfaction for customers. These are not the building blocks for the future.
It will be critical for analysts to pay close attention to individual churn trends in the coming months and year. Churn is essentially the loss of a customer (for whatever reason). With inflation underway and a possible recession looming, this data could be invaluable to understand the negative impacts from some of these ill-conceived ROI efforts. Hopefully it won’t be too late.
It was a Greek business savant named Aesop who once talked about the goose that was laying the golden eggs. Maybe we should all re-read his fable and heed his timeless advice about short-sighted greed.
