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Gambling Business

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Difficulty: Intermediate | Style: Interviewer-led (McKinsey style) | Topics: Market entry, Profitability analysis, Competitive response

Problem Definition

Poker Inc. is currently operating four casinos in Royal City. Competitors are right now planning to open up a rival casino in Kingsville.

Poker Inc. has hired our company in order to assess the consequences of the possible competitor opening and what strategies Poker Inc. should follow.

Comments

This case is made to be interviewer-led. Therefore the interviewer should guide the interviewee through the interview. The questions should be read out and shared with the candidate.

The case is split into two parts:

The first part describes more qualitative problems and has more open questions that should make the interviewee think about the problem and its solution.

The second part is more about quantitative problems and calculations. Here the interviewee should try to make his own calculations and solve the questions.

Short Solution (Expand)

Detailed Solution

Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.

Paragraphs highlighted in blue can be verbally communicated to the interviewee.

Paragraphs highlighted in orange indicate hints for you how to guide the interviewee through the case.

The following structure/framework provides an overview of the case:

First we will start with the more qualitative part of the case.

I. Options

1. What are Poker Inc.’s options to counteract the possible expansion of the competitors?

Information that should be shared with the interviewee:

  • There are currently no casinos in Kingsville.
  • There are competing casinos in Royal City, but they are not relevant as the market is saturated and mature.
  • Royal city has 25% taxes on revenues while Kingsville has 50%.

This is a rather simple question, which should lead the interview to the conclusion that he/she has to evaluate the impact of an own casino on the company’s revenues compared to a competitor’s one.

Main conclusion

  • Do nothing.
  • Open an own casino in Kingsville.

II. Consequences

Now we can start with the more quantitative part of the case.

2. What are the consequences for the current revenue if a casino opens in Kingsville?

Information that should be shared with the interviewee:

  • Poker Inc. revenues are $1 B.
  • Revenues are generated mainly by customers from 4 cities:
    • Royal City
    • Kingsville
    • Banktown
    • Westpark
  • There are no casinos in Banktown and Westpark due to government regulations.
  • Banktown and Westpark are about 5hrs driving time away from Kingsville and 3hr away from Royal City.
  • Kingsville is about 1hr away from Royal City.
  • The customer base is 1.5 million per year.

You should share Diagram 2 with an overview of the revenue per city and Table 1 with the customer segmentation.

After some analysis by the candidate share this information:

  • Gamblers: only want to gamble and care mostly about convenience. They will prefer the new and closer casino in Kingsville - 100% conversion
  • Vacationers: want to get away from their everyday life and stay for a weekend or a week. Therefore they would not choose the Kingsville casino - 0% conversion
  • Experiencers: want to live the casino experience (shows, lights, etc.) and show interest in the casino itself. Experiencers may want to go somewhere else - 50% conversion
  • As customers from Banktown and Westpark have to drive very far to Kingsville, they will still prefer Royal City.

Revenue lost to new competitor casino in Kingsville

Lost revenue = Revenue * % of rev from Kingsville

Lost revenue per type:

Gamblers = $400 m * 25% * 100% = $100 m

Vacationers = $500 m * 25% * 0% = $0 m

Experiencers = $100 m * 25% * 50% = $12.5 m

Total revenue lost = $112.5 m

Revenue lost if Poker Inc. build casino in Kingsville

As the $112.5m lost due to the new casino will in that case benefit Poker Inc., this will not result in a revenue loss. However, the tax rate in Kingsville is higher, and therefore the additional taxes that have to be paid will result in losses for Kingsville.

Revenue lost = Revenue lost to taxes = Revenue of new casino * ∆tax =
Revenue of new casino * (new tax-old tax) = $112.5 m * (50% - 25%) = $28.125 m

Main conclusion

  • A competitor’s casino will reduce the overall revenues by $112.5 m.
  • If Poker Inc. builds own casino, it will reduce its own revenues by $28.13 m due to higher taxes.

III. Conclusion

3. What is your recommendation to Poker Inc. about the strategy?

Main conclusions

  • Poker Inc. should build a new casino in Kingsville.
  • The opening will only affect customers in Kingsville and the different segments will react differently. This should be assessed in more detail.
  • There are although some risks associated with it. For instance could a competitor be first to open a casino and therefore get the 1st mover advantage or there could be high costs of construction/operation of the new casino.

Difficult Questions

How could Poker Inc. compensate the lost revenues?

Possible solutions:

  • Charge an entrance fee.
  • Get rid of extended benefits, like free drinks.
  • Increase the revenue of other segments (food, hotel, etc.).
  • Increase customer demand through
    • Loyalty programs
    • Giveaways
    • Targeting customers near Kingsville, but far from Royal City and vice versa
  • Try to steal share from existing casinos in Royal City (similar methods as above).

More questions to be added by you, interviewer!

At the end of the case, you will have the opportunity to suggest challenging questions about this case (to be asked for instance if the next interviewees solve the case very fast).

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