Covid Recovery Is Coming!
But, Let’s Not Get Overly Confident
by Howard McAuliffe, Partner, Pinnacle Entertainment Group
In February 2020, like many in our industry, we were forecasting a record sales year. By the beginning of April, it was clear this would be one of the most challenging years in our history as the coronavirus spread across the globe. Since April 2020, the industry has been recovering at a brutally slow and inconsistent pace.
The good news is the pace of the recovery is increasing as we start 2021 and vaccines are being distributed at an improving rate. Arcade sales numbers and sentiment in the country seem to indicate that the worst of Covid-19 is behind us, which is great news. There is pent-up demand for social interaction and fun, savings are higher than normal, and more stimulus will be flowing into the economy this spring.
All of this leads us to believe this summer will be among the best we have seen in the out-of-home entertainment industry. A record-setting summer would be very exciting…or at least a relief. We may be feeling similar to the way we did in February 2020 except, hopefully, we have learned our lesson. If profits return to pre-pandemic levels this summer, it is essential that we don’t take them for granted because more challenges inevitably await us and may come sooner than we think.
Macroeconomic forecasts are VERY strong with Oxford economics forecasting a 7% growth rate for the U.S. economy this year. Hiring in America has accelerated more quickly than expected, virus rates are dropping and more stimulus will soon flow into the economy. The February increase in job growth was driven by hiring at bars, restaurant and hotels, industries related to ours.
Additionally, we are hearing from FEC operators in many regions that they are trying to hire but are having trouble finding employees. Some of this is likely due to fear of working in a facility with a lot of interactions with the public, combined with enhanced unemployment benefits that some would prefer to take to stay home.
Nevertheless, as more people are vaccinated, it follows that more will be willing to go to work which should increase the amount of money into the system. All signs point to a robust recovery this summer, which should bring much needed profits to our industry. If this happens and the profits are flowing, we need to enjoy it and remain vigilant.
As the shutdown began last spring, we made a decision as a company to secure as much cash as possible, and immediately drew down our credit lines and did a cash out refinance on some of our real estate. As business recovers and we generate cash, we will repay our credit lines and set aside the cash we pulled from property because we want to be very financially conservative. There are some potential land mines ahead that we want to be ready for. Specifically, these are:
Higher Interest Rates: If the economy recovers as robustly as predicted there could very well be inflation, which would likely lead to increased interest rates. Credit lines and other variable rate financing will begin to get more expensive. We do not want to be stuck with drawn credit lines with increasing rates that we can’t pay off. So, we’ll pay off these lines or set aside the cash to do so.
A Third Wave of Coronavirus: Hopefully, we will have herd immunity by the summer, but it’s possible new strains will prove resistant to the vaccine and we will have another uptick in cases in the fall as flu season starts. We believe FECs should prepare for renewed shutdowns. If they do not come to pass or are relatively minor, then no harm done. Simply stated, it’s better to be prepared.
Increased Costs: Wages were increasing before the pandemic and will continue to rise as the economy improves. Furthermore, there appears to be bipartisan support for an increased minimum wage, though there is a lot of debate on how much to increase it and when. While we should all lobby and advocate for our interests, we should also be planning to pay higher wages sooner rather than later. Another likely cost increase in the medium- to long-term will be tax increases. The amount of debt the country is taking on is staggering and will need to be paid back. Current tax rates are historically very low and will likely rise.
While preparing for these potential challenges is essential, we are not advocating living in fear. In fact, while making sure our balance sheet is strong is important, we will also be investing in the future. The pandemic is providing a lot of opportunities that we will look to take advantage of.
Some specific opportunities that are emerging are good used equipment, favorable financing on new equipment, and attractive real estate. Furthermore, there will be less competition as weaker locations have been closing and will likely continue to close through 2021 so, those who make it through will see a natural improvement in business.
After the brutal year we all just went through, it will be natural to feel some euphoria as profits return this summer. We should all enjoy it, but also make sure we are prudently spending those profits. Ensuring a strong balance sheet will allow us to better handle future shocks as well as put us in a position to take advantage of opportunities that will also emerge.
Howard McAuliffe loves to imagine and implement new products, business models, and ideas, and is a partner in Pinnacle Entertainment Group Inc. He’s an industry veteran who got his start in the business when he was just 16 and has 20 years of expertise in product development, as well as FEC and route operations. Howard’s wife Reem and young son Sami are the center of life outside of work. When he’s not working, Howard can be found enjoying the outdoors, hiking, fishing and mountaineering. Traveling anywhere new or to old favorites like the American West is a passion. Readers can visit www.grouppinnacle.com for more information or contact Howard at [email protected], he welcomes positive as well as constructive feedback and counterpoints.