Letter sent to Darcy Will about GamehostAbout two weeks ago I sent a letter to Darcy Will of Gamehost with a proposal. I'm attaching the letter to the end of this post so that all owners can have a better understanding of the Company, the situation and the reason for the letter.
First I'd like to talk about baseball and I assure you that you will see the point form my discussion of the game.
Baseball In a prior post, I've told you about my love for the game and that I played for about 20 years. I was what you would call a thinking player.
I was known as a very good defensive third baseman; good fielder, wide range, and strong throwing arm. My real secret however was to always be prepared for every possible outcome and simply react accordingly.
I needed to be aware of the count as this would influence what our pitcher could throw next. I needed to be aware of how our catcher was setting up as this would give me a better probability of knowing where the ball could be hit. I needed to be aware of the baserunners obviously, their speed and leads and the number of outs. The score and the inning would influence how they would behave on the basepaths and I would need to take that into account as well. Where was the wind blowing, and the state of the infield need to be considered.
All of this was done without even thinking about. It just came automatically because I had been doing it for so long.
But it didn't stop there. Before every pitch, I would size up the baserunners, their leads and faces and body language and coaches and run through every possible situation in my head. Man on first, ball hit hard to third base line, take two steps towards line, land on right foot, pivot and throw to second to start double play. Or, ball hit softly to third base line, charge in and towards line, make sure runner doesn't round second and fire to first for the out. You get the picture. I would want to be prepared for anhthing so that when it happened I didn't have to waste a split second. I just had to execute. This made me a very good third baseman.
My favorite player of all time My dad. He was my favorite player.
He was a starting pitcher. A southpaw. Tall and lean with a heater and a nasty curve ball. I know it was nasty because I faced it a lot. I became a good curveball hitter because of my dad. I was never a power hitter. No, singles and doubles. Kind of like a Wade Boggs type.
My dad was in the Dodgers farm system. He made it up to AA with San Antonio but he hurt his arm and he was finished. This was before Tommy John surgery. Back then a rotator cuff injury for a pitcher was the end of your career and so he came back to Canada, became a math teacher, met my mom and along I came for which I am eternaly grateful.
He taugh me everything I know about the game and life and he is my best friend to this day.
We would watch a baseball game on tv or in person at Olympic Stadium in Montreal and we would discuss every possible angle of the game. You have no idea how much of a chess game baseball really is or I should say was back then. Now it is basically home run or strike out. Gone is the bunt, the squeeze, the hit and run, the run and hit, the steal etc...yes today it is dull.
Yankees - Red Sox - ALCS2003 - a big lesson to be learned Now to the point.
Back in 2003 the Red Sox were facing the Yankees in New York in game 7 of the 2003 ALCS.
The Sox were leading 5 - 2 after going into the bottom of the eigth inning. Pedro Martinez was pitching a masterful game, good stuff, great control, fooling the hitters. All was well for Sox fans.
The first Yankee up was Ned Johnson. Martinez ran the count full but got him out. One out, nobody on. Martinez pitch count at 100.
I was very familiar with Pedro's mannerisms and what to look for to see if he is weakening because I am from Montreal and saw him pitch a lot for the Expos. What I can tell you is this: when he hits 100 pitches, he is not the same pitcher and when he hits 106 pitches you better get him out fast because if you don't you will regret it. All serious baseball fans knew this at the time.
Derek Jeter is next up and he hits a hard double to right field. One out, man on second, pitche count 105. Get him out now! Grady Little, manager of the Sox leaves him in??
I've written before about how a left handed hitter hits better against a right handed pitcher and vice versa - because they see the ball better as the pitchers throwing arm is opposite of side of the plate you hit from. This is baseball 101. Little kids know this.
So, 5 - 2 Red Sox. One out. Man on second. Tying run on deck.
The next 5 Yankee hitters are all left handed hitters and Martinez is a righ handed pitcher that is tired because he has thrown 105 pitches.
Bernie Williams, left handed hitter, hits a single. It is now 5 - 3, one out and man on first.
Grady Little asks Martinez if he is tired. Martinez says no. Of course he will say no. No player would ever say "yes take me out". Little is paid to manage and not let the players decide if they come out or not. This is a massive mistake. The Sox by the wasy have a left handed pitcher in the pen fully warmed up and ready to come in since Williams came to hit.
Next up, Hideki Matsui, left handed, hits a double to right field. One out, man on second and third. Martinez still in the game???
Next hitter, Jorge Posada, left handed, hits a singly to center. One out, score now 5 - 5. Now Little takes out Martinez after having thrown about 130 pitches!!!!
Yankees end up winning 6 - 5.
Graday little, the management, lost the game for the sox. Why? Because he was not paying attention to how things were changine as Martinez was not the same pitcher in the eights inning as he was earlier in the game. Martinez didn't just loose it all from one pitch to the next. He was changing for the worse slowly and the manager should have prevented this from happening by making changes
before the situation was bad.
The key point to all of this is that you have to prevent from being in a bad situation well before you are put in that situation. You make modifications well before the need arises.
This is what I was trying to express to Gamenost's management. The AGLC has changed the rules and we need to make changes now and not wait until the situation is problematic.
We need to go after a new market of customers. Even though Grande Prairie may like meat and potatoes today it does not mean:
1) All residents of GP like meat and potatotes
2) GP will forever only like meat and potatoes
Demographics change and by the time we see this it may be too late.
Bottom lie of the letter was we can keep catering to our current casino customer as we will continue to offe the same service but we can also cater to a new customer that does not like casinos by building restaurants that cater to more progressive people and that they will be attracted to the casino over time. We can tackle both sets of people.
By not pursuing something more progressive we are acting like Grady Little and playing by the same old playbook when the rules are changing. And they are changing.
Here is the letter:
April 6, 2022
Dear Darcy,
I’ve been a shareholder of Gamehost since November 2020. What attracted me to the Company was its competitive advantage, high returns on capital, conservative uses of debt and strong management. It is clear that you and your team run a very good operation and you should be commended for this.
I take a long-term approach to investing and when I find a company with a competitive advantage, strong fundamentals and an undervalued stock price, I stay invested for a long period of time, typically for more than ten years. Anything less would be foolish as good results come over time.
From 2011 to 2019, Gamehost has generated an average of $21.3M in free cash flow (ex working capital items) per year. Normally a company with the above attributes and this type of free cash flow generating capability would trade at a premium to its intrinsic value and not at a discount as is the case with Gamehost.
This is not a bad situation as it has allowed for the repurchase of shares by the Company at significantly undervalued prices. These repurchases have created shareholder value and increased all shareholders’ ownership interest in the Company. Clearly this was, and still is, a great use of funds. Once again, I commend the quality of the decisions of the Board and management.
Lifting of moratorium As you know, the moratorium on the issuance of new casino licences, in place since 2008, has been lifted by the AGLC and a new four-step process has been put in place.
While it is true that the AGLC will ask all existing casino operators their views on the subject, in the final analysis, only the AGLC will decide the outcome, as only their opinion really matters.
Cases can be made on both sides of the argument as to if new licences should be allowed but Gamehost cannot close its eyes to this new development and simply hope for the best outcome. The Company must assume that new competition will be allowed to form and must defend against this and protect its competitive advantage.
Changes made today, will result in a stronger company, with a deeper competitive advantage, and one that future competitors will find more difficult to weaken. This will allow Gamehost not only to remain the destination of choice of its existing customers but to attract a new demographic of people and allow the Company to continue to earn a high return on its capital.
The importance of a competitive advantage A competitive advantage is what makes a customer want to do business with a company instead of one of its competitors. While some companies don’t have a competitive advantage, those that do, earn a higher return on capital as a result of better margins, which is made possible by this competitive advantage.
A competitive advantage can take on many forms but its durability is essential to earn attractive returns on capital. If the competitive advantage is allowed to erode, as a result of competitive forces setting in, the result is declining margins, return on capital and free cash flow as a percentage of revenues. A competitive advantage must be guarded and continuously strengthened to keep competition at bay.
Gamehost’s competitive advantage Gamehost’s competitive advantage is the location of its three casinos:
- The Deerfoot Inn & Casino is located in the deep south-east quadrant of the city of Calgary and is at a significant distance from all other casinos. It is the only casino in the deep south-east quadrant of the city. The casino is located in Ward 12, which is the most populated Ward in the city.
- The Great Northern Casino is the only casino in Grande Prairie. Evergreen Park is a REC on the outskirts of Grande Prairie that only offers VLT’s and a small number of slot machines.
- The Rivers Casino & Entertainment Center in Fort McMurray has no other gaming competition in the Regional Municipality of Wood Buffalo.
Gamehost’s Fort McMurray location has no competitors. Its Grande Prairie location has almost no competition and its Calgary casino is in a great location far away from the other Calgary casinos. The locations of these casinos are a by-product of good managerial thinking and are the Company’s competitive advantage due to the minimal amount of competition.
Erosion of Gamehost’s competitive advantage Since the AGLC has lifted the moratorium on issuing casino licences and has put in a four-step process, it is simply a matter of time before competition appears and starts to erode Gamehost’s competitive advantage as more competition will be chasing the same customer base. Over time, this will inevitably lead to margin compression and reduced free cash flow as a percentage of revenues.
Strengthening Gamehost’s competitive advantage – a good first step In my view, Gamehost has taken the correct first step to strengthen its competitive advantage when it renovated the Deerfoot and the Rivers. Below is the increase in square footage over that of 2019:
(In square feet)
2019 2021 increase Gaming 109,356 114,356 4.6%
Non-Gaming 21,400 26,074 21.8%
F&B + Live Seating 578 886 53.3%
Gamehost does not need more games. What it does need are more customers and more customers can be attracted by increasing the square footage of its non-gaming and F&B + live seating space and filling it with more entertainment related attractions and better food. This is what the Company has done with its work at the Deerfoot and the Rivers.
This first step will be completed with the spring 2022 renovations and expanded food and beverage areas to the Great Northern Casino.
The reason I say this is a first step is that it will continue to attract the same type of customer that Gamehost has always appealed to but will not attract a broader customer base. There is another demographic of people out there that is not drawn to casinos and simply will not be attracted by an increase in event or food seating space. This customer would never be attracted by the food offered inside the casino, no matter how good it is said to be, as they would never think of going to a casino to eat.
This is a new demographic customer for Gamehost and is rapidly growing. Gamehost could greatly increase its revenues by capturing this new customer demographic while not alienating its existing customers, as the changes that I propose, keep the current casinos intact and operating in the same way that its loyal customer base enjoys today.
New customer demographic base I’m going to focus on Gamehost’s Grande Prairie operations.
Our competitive advantage is our location. It is where we could be attacked and since we have almost no competition in Grande Prairie, it is where we could see competition appear. We need to strengthen our competitive advantage. We can’t continue to just offer lodging, concerts and shows to attract customers to our casino. There is a large part of the population we are ignoring.
Where do young people (under the age of 40) and young families go that they have in common? What can we offer that a competitor, present or future, has more difficulty in offering? The answer to these two questions is restaurants.
Gamehost is in a singular position in this regard. In Grande Prairie, a progressive city, we own land between our casino and hotel that can be used to build an infrastructure of restaurants. Until just recently, the land between these two buildings could not be utilized due to the Grande Prairie Regional Hospital being built. Now that it is completed, the Company is free to build if it desires.
Gamehost also owns a commercial building across the street from the casino that used to house a restaurant. This structure may need to be rethought and converted into a more usable model to reflect a more 2022 restaurant environment.
Gamehost has the construction know how to take on a project like this as you have been in construction since your teenage years and in particular have worked on constructing and renovating many restaurants. In addition to this, the infrastructure can be built at cost, which is a tremendous advantage.
None of our current competitors and likely none of our future competitors have all of these advantageous factors.
In short, Gamehost owns land between its casino and hotel as well as across the street from the casino. The Company has the experience in building restaurants and can do it at cost. This forms the beginning of the expansion of Gamehost’s competitive advantage in Grande Prairie.
It is by far, better to entrench ourselves into the daily lives of our customers and potential customers, before competition appears, as this will cause habits to be formed that are more difficult to break later on.
Psychology books all say that lifestyle habits are more difficult to change when they’ve been around for a while and especially those that involve emotions. That is why Coca-Cola is so popular. Consumers usually drink it when they are having fun and over time the feeling of fun gets associated with the beverage. Think of Pavlov and his dog.
Why restaurants? People are social beings that need interaction with friends and family to maintain mental health and our culture has developed into one that revolves around food consumed outside of our homes. These restaurant experiences (good food and friends in a nice atmosphere) tend to be positive and therefore encourage repeat visits. Over time, the Great Northern gets a positive association as a result of being next door to these restaurants. Restaurants are the perfect complement to Gamehost’s casino and lodging operations.
Right now we are attracting people directly to our casinos. The concerts and shows are held inside of our casinos. This is direct attraction.
With restaurants it will be indirect attraction. Customers come to a separate structure to consume food. They are either on the go (work or other destination) or they are there for leisure. They see the casino next door. Over time this will result in more restaurant customers being casino customers. We make the Grande Prairie hub (casino and hotels) into a leisure hub by incorporating food as a destination spot of its own with the knowledge that this will translate into more total gaming dollars being spent over time, and this is where the margins are.
This restaurant structure also needs to be profitable and self-sustaining of which it could most definitely be. Gamehost could either build the structure and rent out the space or decide to operate the restaurants to have more control over the customer experience and enjoy greater profits. A loyalty point system could be initiated. Customers get points for going to our restaurants. These points can be converted into vouchers to play the slot machines. Over time we develop a new customer base due to these habits being formed.
Which restaurant concept should be used? The type of customer I believe we should attract is called a “foodie” - young, single or with young families, that love a variety of great tasting food, different food, that can be enjoyed with friends in an attractive atmosphere. Foodies are about food and friends. This demographic is young, progressive and has a high disposable income. This is perfect for Grande Prairie.
By design, this is not the typical Gamehost customer. We need to attract different people that, over time, will turn into new casino customers. Food tastes are changing everywhere and foodies don’t want the same old concepts that their parents enjoyed. The Keg, Boston Pizza etc. won’t work.
It has to be a variety of different food concepts as this is what foodies love. The food concepts must be popular but not fads. They should include Asian and Mexican as these are very popular concepts. The fast casual model, which has a core positioning around freshness, ingredient quality, customizable menu offering and an appealing ambiance, could be the best type of venue.
One food day-part that has been very popular for about twenty years has been breakfast. In the beginning it was traditional breakfast food. About ten years ago it started to evolve and the food being offered was greatly elevated. Since about 2016, the breakfast offering has continued to evolve and become even more creative. The line between breakfast, lunch and dinner is now blurring and in my opinion this type of concept can be offered throughout the day and evening. These concepts, and there are many, are packed with foodies under the age of 40. Breakfast food restaurants are a very powerful force in people gathering and I would consider this type of food offering a must.
Two excellent breakfast concepts in the Quebec market are:
- Allo Mon Coco!
- Ben & Florentine
While the name Allo Mon Coco! likely does not travel well outside of the province of Quebec, Ben & Florentine certainly would and both have elevated food offerings. I am not trying to push these two concepts but only use them as an example for the type of food that attracts a certain demographic.
Here are a few additional concepts that illustrate the type of offering that foodies enjoy:
- Tosto Quickfire (tostoquickfire.ca)
- Industria (industriapizzeria.com)
- La Diperie (ladiperie.com)
- Cold Stone Creamery (coldstonecreamery.com)
The local area of Grande Prairie will likely have its own fast casual brands that are very popular and should be looked into. The concepts selected should be catered to local tastes. The above is just an idea for the type of food although Allo Mon Coco!, Ben &Florentine and Tosto have superior food with a wide appeal in the demographic range we should attract.
Going with a franchisor is likely the best route to take as they know the market and their industry really well. Restaurants have evolved a lot in recent years and continue to change as a result of COVID. For example: due to increased demand from customers, special areas are needed for third-party delivery aggregators to pick up the food orders. In Canada, one of the best franchisors is MTY Food Group, which has over 80 restaurant brands and has been in the restaurant industry since the 1970’s.
The bottom line 1) We need to strengthen our competitive advantage because of the removal of the moratorium and the eventual competition that will arise over time. This is not accomplished by buying more casinos or REC's. That would mean staying the same and fighting with our competitors for the same customers. We need to offer something completely
different that people are attracted to, especially the type of people that our future competitors cannot attract.
2) We need to attract the population that would not go to a casino. This is a new market. Our past and current market will keep coming back. We can attract new customers while keeping our old customers. This will provide a big boost to annual revenues.
3) Food is selected as our competitive advantage strengthener because it attracts the foodie demographic which is young and has a high disposable income and is not our typical customer and therefore leads to new business over time.
4) The concepts selected must offer very fresh, high-quality food that use high-quality ingredients. The menu must be customizable. The atmosphere must be enjoyable and the customer service must be superior. Foodies are all about food and friends and so the above is a must.
5) Eventually these foodie customers will enter the casino and this is where the magic happens. The casino would be right next door to the foodie venue – a few yards away. They see the casino every time they go to the restaurants. Over time it sinks in. All it takes is for one person to say to their foodie friends upon leaving one of the restaurants: “let’s go see the casino” and new customers can be developed and retained. A new demographic of customers!
6) The company that can offer more than just satisfying the needs of the customer will develop a large competitive advantage and have superior margins and free cash flow generation. A competitive advantage is either strengthening or it is weakening. If it is weakening, it will eventually fade away and competitors that "get it" and offer great products and experiences will gain market share. Let us make Gamehost the toughest competitor and dissuade future competitors from entering Gamehost’s territory due to our strong product offering and superior customer experience.
Gamehost can be an incredible destination, an entertainment hub, a destination for fun, and one that attracts a new demographic of customers while not alienating our established customer base.
This type of “food emporium” can get us there and the foodie demographic is the key.
Gamehost 2.0!
Regards,