Casinos are going through a poor run of luck
Gamblers have less cash; sports betting erodes market share
Not long after the first democratic elections, legalised gambling was unleashed on South Africans, who promptly flocked to the growing number of casinos, each more ostentatious than the next, that offered the chance to have a “flutter”.
But the depressed share prices of the country’s two big casino and hotel operators — Tsogo is down over 20% and Sun International’s share is nearly 40% lower in the year to date — raise the question of whether there is still scope for growth in this industry, especially as consumers are under pressure and there has been a proliferation of alternative gaming options.
The recent poor results from Sun International underline this trend.
It’s not that the industry has shrunk. Casinos are still a multibillion-rand business. A survey by the Casino Association of South Africa says that for financial 2015-16, revenue was R18.2-billion, but the illegal gambling industry cost the fiscus R140-million in lost gambling tax revenue in the same financial year.
And casinos are losing their share of the gambling rand to other betting options, horse racing, bingo and limited-payout machines.
National Gambling Board statistics show casinos now have 66.4% of the total gambling market compared with 84.4% in 2010.
Share has shrunk
Pietro Calicchio, a director of PwC, said although alternative forms of gaming had shrunk casinos’ share of the total gambling market and the casino market was now mature, there was still room for growth. But this would depend on improvements in the local economy and an increase in consumers’ disposable income.
“Given the current local economic conditions there is pressure on casinos,” he said.
National Gambling Board statistics for the year ended March show casino gross gambling revenue decreased by 1.8% when compared with the previous financial year.
Horse racing and sports betting represent 18.9% of total gross gambling revenue in 2017. There has been marked growth in the betting industry mainly due to bookmakers offering betting on sport — up 22% for financial 2017. Limited-payout machines represent 10% of total gross gaming revenue, with increases attributed to an increased number of active machines in all provinces.
No more casinos
There will no further roll-outs of casinos. The number of authorised casinos is capped at 41, including two that are yet to have licences issued: one in the Eastern Cape and one in Mpumalanga.
In its gambling update released this year, PwC forecast that money spent on casino gambling would increase from R18.23-billion in 2015 to R22.38-billion in 2020. The National Gambling Board estimates that 17.5% of the gambling population engages in illegal gambling and that this remains a competitive threat to licensed gambling.
An analyst who declined to be named said that in South Africa, young people still went to casinos compared with places like the US, where they wanted more interactive experiences and mainly older people patronised casinos. “South Africa still has a pretty young profile of casino-goers.”
But despite these younger customers, growth is likely to be constrained.
De Wet Schutte, an analyst at Avior Capi- tal Markets, said the casino industry was now mostly mature and almost certainly on a lower growth trajectory than in the past. “There was strong growth in the early years when the novelty factor was still quite strong, so the argument is that it’s a bit more mature now and more dependent on the shape of the economic cycle than in the past,” he said.
Positive sentiment
As for Sun International, the company faced headwinds from a very difficult consumer environment and a lack of consumer confidence, “which is a critical component for gambling revenues to grow”, Schutte said.
“The industry needs positive sentiment and a wealth effect in the economy for the situation to improve meaningfully. It is difficult to see that happen over the near term.
“We don’t expect casino revenues to fall off the cliff, but these are operationally geared businesses that will inevitably show profits under pressure when revenues flatline.
“In most cases the footfall is still there, but the spend is not.”
Tsogo, the biggest casino operator in the country, is seemingly on a different strategic path and plans to carve out its hotel assets. “The look and feel of Tsogo’s business could potentially in the future resemble more of a hotel and casino management company than a fully integrated hotel group,” said Schutte.
Footfall up
Anthony Leeming, the CEO of Sun International since February, said casinos had been hit by new forms of gaming. “Casinos have been around a long time and they are in a mature phase, but there’s still potential for growth.”
Footfall at casinos is marginally up, but spend is down about 4% to 5%. With the uncertain economic environment the consumer is under pressure and this is affecting discretionary spend. The group is closing its International VIP programme, which wooed top-end Chinese players from overseas.
Sun International is looking at how to strengthen its balance sheet and plans under consideration include a rights issue, sale of assets and attracting a strategic investor.
The group has invested heavily over the past four years, funded through debt.
Casinos remain cash-generative and while operators continue to have promotions and incentives for their loyalty programme members and VIP punters, they are looking to drive efficiencies and cut costs.
Casinos are in a mature phase, but there’s still potential for growth Anthony Leeming CEO of Sun International