Arguably the biggest initiative on readjusting the rents of AWP machines in the UK for many years has been initiated by Sceptre Leisure, one of the country’s largest operators.
Yesterday, the company distributed a letter to all of its retailer customers indicating that it plans an across-the-board 8.7 per cent increase in rents on machines which are not currently subject to a contract.
This takes in about 50 per cent of the current 21,000 machines in the Sceptre estate.
If Sceptre’s lead is followed by its main competitors, Gamestec and the Independent Operators’ Association, then it will force up rents by the most significant amount in living memory.
Rents on British AWP machines, officially named Category C under UK regulations, have increasingly lost ground over the years, through fierce competition and an uncompromising stance by customers, initially the breweries and latterly the pub-owning chains, known as “retailers”.
Recent hikes in the cost of machines – up 40 per cent in the past couple of years – have been the result of a firm stance by manufacturers, concerned at their inability to carry out necessary research and development of new games. The new initiative by Sceptre is not an unexpected result.
We recently reported that the new £100 jackpot in Category C machines was not seeing profits from machines heading back to operators. Many retailers had indicated that they would not pay extra rents for the new-limit machines and that rents as low as £35 per week for a five-year contract with no increases were being demanded.
Sceptre CEO Ken Turner, in his letter to customers, stated: “Over the past few years, machine operators and manufacturers together have worked hard to drive revenue levels, develop new products and improve connectivity and security within the market. Such improvements do not come without a cost, however.
“The purchase price of a new machine has risen by 40 per cent in the past 18 months and innovations such as digital gaming and remote monitoring have also had significant cost implications for operators.
“Our industry requires significant investment in research, game design and other technology to maintain and improve future cashbox levels. Operating margins in other areas have also been under pressure, with transport costs in particular increasing significantly year-on-year.”
Turner makes the point that the industry only works if all three parties - retailer, manufacturer and operator - receive a fair return for their input. While retailer revenue has remained stable over recent years, machine operator income has fallen.
“It is for this reason that we have seen one national operator sold at a significant loss to investors; a number of regional players withdraw from the market due to margin erosion; and two significant machine manufacturers close down in the last 18 months,” added Turner.
Rising costs and reducing real-terms income has led to the review in Sceptre’s pricing and the 8.7 per cent increase would take effect in December, 2013, he said.
In an interview with InterGame yesterday, Turner was adamant that there was no alternative to the increase. He said that the circular letter, which was also going to those retailers who are currently holding Sceptre contracts, was backed by inarguable statistics. It was inevitable, he said, that when the current contracts end, then increases would also be levied on those customers.
“The letter effectively serves notice to our contract customers that the present rent levels are simply not viable any more. We are keen to work closely with our customers, whether contracted or not, to maximise their income from machines and the new £100 jackpot offers a way to do this. But it must be against a background where all parties involved can benefit. This is part of the process which is needed to put the market back on a proper footing.”
What is a “proper footing”? One where approximately one-third of the cash box goes to the operator.
“We (the operators) take all of the risks involved in a high-fashion industry - the asset investments, the damage to the assets, the collection services, the full bespoke financial management system and many other facets - and the cash box was always the way the industry has worked. In the days where we had a tenanted sector the split was always one-third to the tenant, one-third to the operator and one-third to the location owner.
“In managed houses that was one-third operator and two-thirds brewery or owner. An over-supplied market place has seen the share of the operator driven down.”
Turner illustrated the plight of the operator with figures. “In 2011 we had 3,100 SWP machines in our estate, earning £38 a week. We still have those 3,100 SWPs but they are earning £12.20.
“Our group figures have therefore fallen from 3,100 machines at £38 for 52 weeks, totalling £6.125m, to 3,100 machines at just £12.20 for 52 weeks - or just £1.966m. Our profits are down by around £4m as a result. At one time our costs were based on 42 machines to one employed person; now we have trimmed our costs to 66 machines for each person.
“Whichever set of statistics you look at, the conclusions are the same. The operators simply cannot make money on machines with the current state of affairs. Since 2011 the price of an AWP machine has moved up 40 per cent; a retailer doesn’t think about the costs to the operator of a new Bell-Fruit machine with a dongle and a note recycler, which will set us back £2,700.
“It is simple maths… We write off a machine over three years; the capital costs of the investment run at 12 per cent, so the machine actually costs us £3,024. Divide that by 156 weeks and there is a depreciation of £19.38 a week. That comes out of our rent, together with all of the other costs, wages, transportation, electricity, rates, depot costs and all of the rest of the infrastructure – and that’s without the costs which might come from unforeseen incidents, such as machine break-ins.”
Would the other operators back the Sceptre initiative or will the retailers be able to fall back on the familiar tactic which goes back to the old brewery controller days and “divide and conquer”?
“I don’t know what my competitors will do,” said Turner. “I would be very disappointed if they don’t follow suit. It would be unwise not to take advantage of the new stakes and prizes examined at the same time as a careful look at the sums, which we have done.”
Turner described the current situation as “a huge opportunity” for both the operators and the retailers. “The new stakes and prizes levels and the pubs industry ‘bottoming out’ as I see it, means that operators will be able to help their customers to boost their bottom lines, but we can only do that if we in turn can benefit too.”
He said that he had already had a gratifying initial response from some of his customers, who understood the reasoning behind the Sceptre initiative. “I don’t believe that we will lose significant numbers of customers from this move of ours, but if we do then so be it, as the old business model simply couldn’t be justified any longer.”
Sceptre Leisure is now part-owned by one of the most powerful gaming organisations in the world, Gauselmann Group from Germany, which last month secured a 25 per cent share, while other major shareholders include Turner himself with 20 per cent and co-founder Tony Yates with 10 per cent.
