Recession on the horizon?

We live in a risk-on environment with lots of indicators pointing to a near-term recession. What does this mean for regional casinos?

Unfortunately, the data surrounding the last recession is limited and significantly variable. Through our research, we identified 25 casinos that were operating in reasonably stable competitive conditions and which had no significant expansion during the Great Recession in 2008-2010:

• The mean decline in revenues from 2007-2010 was 4.8% but the median decline was only 2.1%.
• Variability was significant. The range of results included a worst case 22.6% decline, but a best case increase of 17.2%.
• 17 of the 25 casinos experienced declines in revenues over the three-year period ranging from 0.6% to 22.6%.
• 8 of the 25 experienced increases in revenues ranging from 3.9% to 17.2%.
• 68% of the casinos experienced declines.

In addition to these casinos, we reviewed the results of 26 other casinos that were either experiencing increased competition or which were in their initial growth phase. Casinos impacted by competition experienced an average revenue decline of 14.9% and those in their initial growth phase saw revenue increases averaging over 23% despite opening during the worst recession since the great depression.

A few important conclusions.
• If your casino is in a mature environment, there is a high likelihood that revenues will decline over the period of a recession, and those declines could range up to over 20%.
• If your casino is in its initial ramp-up period, there is a good chance that revenues will increase through a recession.
• The key to riding out a recession without significant impacts on EBITDA will be to reduce operating leverage, i.e. exchanging fixed costs where possible for variable costs.