A new report has revealed the scale of the challenge facing England's existing casino estate in England and Wales once the government's smoking ban comes into force on 2 July 2007. The report, 'Fewer Chips Without Fire', from leading industry consultancy, Global Betting and Gaming Consultants (GBGC), indicates that a fall of 8.4% in casino income (house win) is likely on table games, based on comparisons with Scotland where the ban is already in operation. On gaming machines the fall is set to be even more. In an industry with typical operating margins of 10-15%, this represents a major financial headache.

Right in the firing line are major players Rank, Gala Coral and Stanley (Genting) which operate the largest casino estates in England and Wales. Particular problems face operator Rank, which is also exposed to the declining bingo market. Rank derives 60% of its earnings from bingo and recently closed 9 English clubs. Rank's Grosvenor Casino Estate will face a fall in revenue of approximately £20m on 2005 income of £207.9m, according to GBGC estimates.

GBGC lead partner, Warwick Bartlett, commenting on the report, said: "All the focus on the liberation of the casino industry and the award of new licences has obscured the very serious problem facing the existing casino industry as a result of the smoking ban. It is clear that there will be closures, and the challenge for operators is to maintain margins as far as they can - and to find ways to extend their client base into the non-smoking population."

The report notes that the worldwide trend in smoking restrictions has been problematic for casino operators in various jurisdictions. Substantial falls in revenue have been experienced in Australia, the US and Canada. The response by public authorities in jurisdictions which have state monopolies (such as Sweden) has been to introduce limited bans. In Malta the full ban was reversed when revenues fell catastrophically.

The resulting impact will be felt not only in terms of direct revenue, but will have a knock-on effect on the government's duty take (currently almost £300m) from the industry and in employment. Some 16,000 people are employed in the industry and duty levels can rise to 40% depending on the house win generated.

The key findings of the report include:

• The evidence from Scotland is unambiguous. The smoking ban in Scotland (introduced on March 2006) resulted in a fall of 4.3% in admissions compared to 2% in England and Wales (excluding London); a reduction of 12.6% in the drop (the amount of cash exchanged for chips - England and Wales saw a fall of 8.5% in the same period); and house win down 16.7% (8.3% in England and Wales).
• The double whammy for the industry is that smokers are more likely to gamble and more likely to gamble more. Breaks in gambling to leave premises to smoke are particularly bad for high-margin slot machines, as punters prefer to feed these continually in the hope of qualifying for a big win.
• The impact on the stratified and global London casino market is more difficult to quantify. However, it is a reasonable assumption that mainstream London casinos without a global or high-rolling clientèle could suffer the same impact as Scotland.
• Bingo operators in Scotland have experienced a similar downturn, estimated by the industry as a fall in revenue of 15% plus. This is attributable to the greater reliance of the bingo industry on slot machines than the existing casino sector. However, the impact is likely to be higher on the new wave of casinos licensed under the Gambling Act as they will have a greater reliance on the income from machines than tables.

Industry response

Far from just predicting the decline the report sets out a number of responses which the casino industry will have to take in order to mitigate the effect of the smoking ban. These include:

• Seeking urgent clarity from local authority associations on their interpretation of smoking areas as specified in the draft smoking regulations - and a commitment to allow swift approval to get these in place
• Operating a reservation system on slot machines where there are enough machines to enable this - so that punters who take a cigarette break do not forfeit their chances of winning
• Direct marketing to non-smokers on the tobacco-free environment casinos will offer
• Smoking substitution provision, such as finger and snack foods on a complimentary basis
• Develop the provision of licensed hand-held gambling machines for smokers who leave the gaming floor

In the longer term the industry may have to lobby to relax the restrictions in order to avoid a financial melt-down. But that is likely to be a possibility only in the event of a change of government or a serious impact on government revenues.