Turning Around a Distressed Casino

By Bill Zender

[Note: Temporary downturns in the casino's live game or slot hold percentage does 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 fluctuations of both positive and negative proportions. In many instance management overreacts to the dreaded, but still normal, downward swings and actual 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

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; while external factors included a new "no smoking" law and the over building of card rooms in the San Francisco Bay area. Through the implementation of drastic cuts in unnecessary spending, reevaluation 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 level of market base and competition, as well as nationwide changes in consumer economic confidence levels. In order to cope with these economic shifts the casino operation needs to be prepared to react in kind. In some situations organizations who hesitate to take action and put off their decision making will find themselves behind the 8-ball, unable to adjust to the economic problems in a timely manner.

Internal factors usually involve management's inability to operate the casino in a profitable manner, or from an inadequate cash flow; both usually highlighting the other. In many situations upper management does not possess the operational ability to cope with problems and in many instances actually create additional problems though improper analysis ability and poor decision-making skills. Although internal factors are easier to correct then external factors, management sometimes insists on following obsolete programs and/or stands behind faulty decisions until it's too late to make the necessary business and operational corrections.

The primary objective for an organization during a turnaround situation is to conduct a concerted effort to stop the decline of profits, and reestablish key business differentials or competencies that give the casino operation a competitive advantage. In order to accomplish the complete turnaround of an operation management needs to begin through reorganization known as "retrenchment" (Pearce & Robinson, 2003). 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 customers that provides a low margin of return.
• Asset reduction – This includes sell non-essential property, terminating low profit participation contracts and leases, selling under utilized 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 is the replacement of key management personal (Pearce & Robinson, 2003). The introduction of new management, executives who have a successful industry track record, especially with turnaround situations, provide the organization with a new and different perspective of 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 case, 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 1990's we had are 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 the facility up to standards. All needed 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 and extensive advertising schemes.

It was at this point where we concentrated our attention on the only asset we had that could give use some competitive parity or possible advantage, and that asset was 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 somewhere else to work. Sometimes the greatest obstacles to overcome are defeatist attitudes breed through continuing poor attitudes of management towards the employees. Negative attitudes will 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 obtain 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 into bankruptcy and liquidation. 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 will then follow in the footsteps of financial stability. It is at this point that management has the ability to reexamine their gaming business, exploiting their 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 in which retrenchment response will be formulated. When the financial situation is high in severity, there is 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 strategy 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 their distress is low.
• Turnaround strategies that eliminate costs present an immediate return to the operations bottom-line, while strategies to increase revenue tend to return bottom-line cash flows further down the road and may place a greater strain on the operation during the period of distress. It is widely known in the business world that you can not "spend" your way out of financial dire 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 to 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 future successful 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 be result form your properties market uniqueness, its ability to cater to a specific market niche, or from the strength and experience of your new management team.
  

Side Bar – Steps Towards a Successful Turnaround

Here are some steps our management team, JMJ, Inc., used at the Aladdin Hotel/Casino in the mid-90's, to help turn a previously bankrupted and extremely tired property around:

• Analyze the businesses financial reports and chop any expense not essential to the operation. Waste can be found in executive perks, overtime cost created by poor scheduling, over-comping casino customers, and unnecessary entertainment and participation agreements. Cost elimination frees up revenues and increases cash flows immediately.
• Discontinue all promotions until you have 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 doesn't pencil out, get rid of it!
• Whenever possible stay 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. Natural attrition should allow you to lower the staffing levels to a point where they become effective within a workable period of time. If layoffs are necessary be sure they're all done in the shortest time-span possible (one day is best). Don't leave your employees waiting in agony for the other shoe to fall.
• Get employees to think in terms of success instead of failure. Focus on positive customer service and customer relations before spending resources on marketing and advertising. Any money spent on bring in new business will be wasted if your frontline employees are not providing above average customer service.
• Remember, when taking over a distressed operation you will probably need 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 may need immediate attention in order to keep the business in operation.

References

Pearce, J.A., Robinson, R.B. (2003). Strategic Management: 8th Edition. New York: McGraw-Hill Irwin.