Dispensing Strategies: Mad Money
By Michelle Brisebois
By Michelle Brisebois
There’s disposable income and then there’s discretionary income. The
first is what you have to spend after the government claws back its
share, the latter is what you’ve got after you’ve paid for the
necessities such as rent and food.
There’s disposable income and then there’s discretionary income. The first is what you have to spend after the government claws back its share, the latter is what you’ve got after you’ve paid for the necessities such as rent and food.
Discretionary income is as it sounds – money to be spent at your discretion, a.k.a. “mad money.” From there we could easily descend into a discussion about wants and needs and it doesn’t take much self-delusion to conclude that the Caribbean trip we’re planning isn’t a “nice to have,” it’s a “have to have.”
Those of us who make our living in industries tied to life’s little luxuries such as gaming and entertainment, revel in economic times that see discretionary income nice and healthy. This typically occurs when employment is high and interest rates are low. Check and check – that would describe the times in which we currently live. If you’re over the age of 30, chances are that you’re well aware of our economy’s cyclical nature: what goes up … well, you get the drift.
So, what appears to be on the horizon for Canada’s economy? How will the possible faltering U.S. economy affect Canada? Will the good times continue to roll or will rising energy prices and interest rates make consumers look for areas to trim the fat? If they do cut back, just how will it affect leisure activities such as gaming and video gambling?
Statistics Canada looked at discretionary spending on entertainment from 1998 to 2003 and made some interesting observations. Canadian households have been directing more and more of their budget to four key entertainment services outside the home, but the amount they spend on such services is still less than 0.5 per cent of overall household spending, according a study published in June 2006.
Households spent $3.2 billion in 2003 attending movies, performing arts, and spectator sports events and visiting heritage institutions, up 41per cent from 1998. The $273 that the average household spent on these entertainment services in 2003 illustrated a robust 31 per cent increase from 1998, well above the overall 19 per cent increase in the average household’s spending on all goods and services. Clearly, Canadians consider entertainment a financial priority in boom times.
Ontario and Alberta households spent the most on average, with the Atlantic Provinces spending the least. In all cases, the difference in average household spending was directly tied to discretionary income.
Consumers living in provinces with healthier economies have more to spend after the bills are paid.
It’s clear that adult entertainment has a positive relationship to discretionary income. If there’s more left of our paycheques after our bills are paid, we’ll partake in more fun and games. If times are tight, we tend to cocoon and find our fun at home. The $50,000 question is, “will forthcoming economic conditions curtail discretionary income or leave a little wriggle room?”
If Canada were a retail store, our VIP customer would be Uncle Sam. We export 30 per cent of our goods to the U.S. and so it makes sense that our economy would suffer if theirs does.
Many economists believe the U.S. is on the verge of a recession with a housing market that’s deflating faster than Paris Hilton’s record sales.
However, employment is expected to stay high and interest rates are expected to stay relatively low. So, nobody seems to be running for the hills just yet. Canada’s economy is expected to grow at a rate of 2.7 per cent in 2007 and that bodes well for discretionary income.
David A Korn of the University of Toronto, did confirm in one of his studies that all forms of gambling, including the purchase of lottery tickets did increase with household income. The only exception to this was bingo activity, which increased with lower household incomes. The key to staying recession-proof will be for the gaming/entertainment industries to target those market segments that are less vulnerable to a slowing economy. Will the senior citizens please stand up?
We know that casinos thrive on the senior population and various studies indicate that problem gambling is fairly low with this segment. They tend to treat gaming as healthy entertainment and spend their money accordingly.
If interest rates climb, that bodes well for those who have lots of savings and little debt. Younger Canadians will cut back on entertainment if the mad money is sucked up with larger mortgage payments. Older consumers have more time to spend on gaming and entertainment and will be enjoying higher returns on their investments if rates increase.
According to Michael Gartenberg, vice-president and research director of Jupiter Research, the older market is extremely important because the older consumer exhibits diverse tastes in genre and is increasingly becoming connected to the Internet.
However, the preferences of this older demographic have not necessarily been satisfied by the current video games on the market. Affluent seniors are much more likely to be avid golfers (Travel Activities and Motivation Survey 2001) and perhaps video golf would be a wonderful activity should mobility prevent an aging golfer from hitting the links.
For those products targeting younger consumers, look at changes they may make if they must tighten their financial belts. If you have machines that reside in foodservice establishments, consider other locations as well that may be less affected by a smaller discretionary budget.
Investopedia advisor Glen Curtis is recommending several quick-service restaurant chains as good investments because in
slower economies, people will still eat out but perhaps go to a more casual venue. Consider looking for restaurant partners that feature a quick-serve format.
Predicting the economic twists and turns is a bit like predicting the weather. Sometimes you can read the signs and
prepare accordingly and other times you just get stuck in the snowstorm.
It looks as though Canadians will continue to be employed and relatively stable in spite of rougher times possibly ahead for our neighbours south of the border. That’s good for discretionary income and for our industry. On the other hand, it’s also wise to take all predictions with a grain of salt.
As Nobel Prize winning economist Paul Samuelson puts it, “the stock market has forecast nine of the last five recessions.”