Knowns and unknowns of Victoria's gaming environment

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KnownUnknownThere are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.” – Donald Rumsfeld, US Secretary of Defence (2001-2006)

Rumsfeld may have sounded a bit crazy spouting the whole known knowns, unknown unknowns business, but let’s use it as a framework for analysing the macro environment for gaming in Victoria over the next five years.

Known known

For the majority of venues, gaming entitlement payments will be paid off in 2017 improving venue cash flows, providing an opportunity to invest some capital in venue improvements. It is likely that most venues who engage in some future planning will have this factored in and will be planning capital works now. So consider that specialised hospitality architects and builders will be busy; and likely charging a premium as demand ramps up. These improved cash flows and investments will lead to a hyper-competitive market dynamic and those who get left behind while their competitors invest in improvements will struggle to maintain market share.

The other thing smart venues are doing is planning to put a portion of those concluded GME payments into a capital reserve for 2022 to ensure they’ve got a war-chest to potentially buy their EGMs and negotiate their arrangements for the future from a position of strength. Venues will have to decide – GSP or no GSP? Even those who decide to continue the GSP arrangement will be better positioned to negotiate their next contract if they have cash reserves sufficient to make good on a ‘walk away from the negotiating table’ threat.

Develop a long term capital expenditure, debt service and cash flow plan for 2016-2021 and capitalise on this positive known known.

Note: If the cost of buying the fleet in 2022 is likely to be $12-15K per EGM (a mix of brand new and second hand), the smart operators will be putting some funds into a capital reserve in readiness to purchase their own fleets – so about a million bucks for an 80 machine site.

Known unknown

I’d suggest this known unknown is the hottest question in the Victorian gaming industry – what will the next entitlement scheme look like? Auctions, tenders, first and last rights on existing entitlements, upfront payment or vendor financing (i.e. quarterly payments), fixed fees or market based pricing… maybe it’s more unknown than known!

I’d also suggest it’s a known unknown at Spring St too. What can venues do in the face of this known unknown? Support your peak body (AHA Vic, Community Clubs Vic, ANZAC House) in their submissions and negotiations to government. Make individual submissions in support of the industry when appropriate. Responsibly operate gaming with regards to operating practices and promotions, taking care not to fail ‘the Herald Sun test’.

The other advice for businesses in an industry faced with uncertainty would be to plan, maximise your business performance to ensure you’re in a strong position if the known unknown turns out to be worst case scenario. The only option in the face of this known unknown is to optimise performance while there is certainty.

Unknown unknowns

This is like the T in your typical SWOT analysis so let’s work through it in a logical PEST format – political, economic, social, technological.

The political threats are almost known unknowns. Almost. As in, we known there’ll be curveballs just not what form they’ll take. It could be tax increases from the State Government (like you, they’re aware that your cash flow improves when your entitlements are paid off and they just might like to take a bigger slice). The other political threats include further restrictions on smoking, max bets, cash withdrawals, trading hours, etc. The list goes on. The other bogey man we should all be scared of is Saint Nick from South Australia. Xenophon is still influential among cross benchers in the Federal Senate (possibly more so post a double dissolution if it occurs in July) and a government desperate to pass legislation just may consider doing a deal ($1 max bets anyone?).

Economic threats are the same as those that affect the broader economy. Though luckily gaming is counter cyclical in some respects. In fact, slow growth will likely keep interest rates low making this a good time to borrow and invest in your venue (i.e. money is cheap). Further, any increase in unemployment would boost the number of people wanting to work in venues, even if it’s as a second job to make ends meet, giving industry a larger pool of good potential staff members to choose from.

Social threats abound in Victoria. There are two types of people in this state – those associated with gaming (punters, industry folk) and those who hate pokies. There’s no real middle ground where large swathes of the population are ambivalent towards pokies and happy to enjoy the value for money F&B provided at venues subsidised by EGMs. Again, your responsibilities as a good industry participant is to make good on corporate social responsibility obligations and then spruik them loudly to MPs, local rags, venue-owned media channels (print, online, social) and in-store (e.g. a bloody big pull up banner quantifying a dollar value of community contributions, employment facts, purchases from local suppliers, taxes paid, etc.).

And, of course, the major technological threat is online gaming. Let’s not be the next taxi industry and get trumped by our own Uber. Let’s recognise that our investment in bricks and mortar is no longer a guarantee of future success. Focus on creating experiences for patrons that are based on connections and engagement with staff, on exceptional service, on luxe fitouts, on safety, comfort, entertainment… the things that can’t be simulated on a Queen of the Nile on an iPhone.

So whaddaya know from the known and unknown knowns?

What can we take away from our Rumsfeld-inspired analysis?

  1. Develop a long term strategy that covers finances, investment and growth
  2. Develop a long term cash flow and capex plan – factor in improved cash flows from 2017 onwards, allow funds to invest in your venue and facilities but remember there’s a sting in the tail in 2022 when you may need $1-2M to purchase your EGMs
  3. Support your peak body (AHA, CCV, RSL Vic) wholeheartedly in getting the best outcome for industry regarding the new entitlement scheme. Hope for the best and plan for the worst.
  4. Drive your assets hard for the seven year timeframe that you have certainty – win market share and grow revenues, be disciplined with expenses and prudent with cash management so you’re positioned strongly when the uncertainty begins
  5. Don’t give the industry a black eye by being the venue that incurs the wrath of the hostile media, state government, regulator, or the luvvies on the left who hate the pokies. Basically, don’t be the publican with the personalised plates 600-NMR on the back of his Range Rover!
  6. Set a budget for investment in people, development, training, etc. so that you can create the experiences that ward of the threat of punters wanting to stay in their homes and on their devices playing online slots. Perhaps 0.5% to 1% of revenues would be a good benchmark.

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