A lot of attention has been given recently to the effects a recession would have on casino companies.
It might be time to shift emphasis to inflation.
Of course, the two are intertwined, as the antidote to inflation of higher interest rates might poison the economy into recession.
But inflation in itself can depress the hard-won high operating margins that casino operators have achieved through cost reductions.
In addition, the higher rates paid to debt holders creates a competitor to stocks. Why, after all, own stocks in uncertain times when risk-free government notes pay over 4 percent? Plus, higher interest rates raise carrying costs for companies with variable debt and will add to the expenses of those seeking to refinance debt or borrow to fund growth.
But let’s stick to inflation itself for right now.
Wages are one major and obvious area of rising prices. Take two recent examples:
- Atlantic City: The Unite Here labor union has negotiated big wage increases from AC casinos. Starting pay will rise from $18 to $22 an hour in the fourth year.
That is a big increase. And you can bet what happened in Atlantic City won’t stay in Atlantic City. It will follow in some manner in the rest of the country.
- Hard Rock has gone even further. It has raised pay for 10,000 non-tipped employees—95 percent of job classifications, including cooks, housemaids and front desk workers—with minimum pay going from $18 to $21 an hour.
Some workers will get 60 percent raises. In Florida, entry level pay will rise $16,000. In Atlantic City, entry level pay will go from $27,040 to $37,440.
Hard Rock’s assertiveness might prove to be a brilliant strategic move by making it an employer of choice in lodging and hospitality much like Costco has become an employer of choice in retail and helping it attract and retain high quality employees who give it a competitive advantage that outweighs their higher costs. In other words, having the best workforce isn’t an expense. It’s an investment that generates a return.
But there is no question that, just like unions will negotiate higher wages for members, companies competing for labor will have to pay more in salaries and benefits.
Inflation will affect a wide range of expense items from electricity to cleaning supplies.
Here is a somewhat off-the-wall example, but the kind companies face—in his first-quarter earnings conference call, Full House Resorts CEO Dan Lee described how the price of crab meat had squeezed EBITDA margins at Silver Slipper Casino in Mississippi. The price had shot up 110 percent and Full House spent $4.6 million for crab meat on a popular buffet item, up from $2.4 million in the previous year.
The decision was made to maintain the buffet price and—you should excuse the expression—swallow the higher price of crab meat.
Casino operators will be facing similar decisions in many more ways as inflation works its erosive way through operations
Put simply: In upcoming conference calls, it will be wise to look at the outlook for costs, as well as those for revenues.
