By NEIL HARTNELL
Tribune Business Editor
Island Luck yesterday warned staff to brace for up to 350 job losses after it was "unsuccessful" in mitigating the impact of a 184 percent tax rate hike on its business model.
The Bahamas' largest web shop chain, in a memorandum to employees, said it will conduct a performance review for all 800 staff over the next 21 days as it prepares for location closures to better align operating costs with revenues and profitability.
The staff note came after Island Luck wrote a letter to the Gaming Board warning that up to 350 jobs, around 44 percent of its current workforce, were in danger as a result of the 200 percent operating cost increase imposed by the 2018-2019 budget's tax hike. This was forecast to reduce operating profits by 85 percent.
Shanette Rahming, Island Luck's human resources and training manager, told workers that the company was being "forced to confront some difficult choices that arguably businesses in a free market should never be forced to confront" given that the government has shown no sign of backing down over the increased taxes just nine days before the new fiscal year starts.
Acknowledging that the new "sliding scale" tax structure "will significantly increase the operating costs of all domestic gaming operators", Ms Rahming wrote: "We have worked tirelessly to help mitigate the impact of the proposed tax structure on the industry, on our company and on our staff.
"However, to-date our efforts have been unsuccessful. We will continue to work diligently. However, we must also now begin to make preparations for this unfortunate reality."
Describing Island Luck staff as the company's "most valuable asset", Ms Rahming then warned: "Unfortunately, as a result of this unprecedented, significant and drastic increase in our operating cost structure through government taxation, we have been forced to confront some difficult choices that arguably businesses in a free market should never be forced to confront."
She said "performance assessment exercises for all staff" will be held over the next 21 days, with the results likely to determine which employees will be laid off should Island Luck be forced to close marginal or non-performing web shop locations.
"It is important to note that this performance assessment exercise will not serve as a determinative factor with respect to any downsizing decisions, but will be a factor in the event of store closures and redundancies," Ms Rahming added.
"We will continue to do our best to mitigate against store closures and job losses, and we will do our best to ensure transparency and fairness to support our staff during this period."
Island Luck's move comes just days after rival web shop chain, Asure Win, revealed it plans to close 11 of its locations - and terminate 50 jobs - by month's end as it seeks to shed underperforming sites in a move also blamed on the Budget's tax increases.
Asure Win indicated that further closures and terminations may follow once an in-depth review of its business model is completed, and the web shop industry is likely to seize on yesterday's developments at Island Luck to further bolster its case that their worst fears and warnings are coming true.
Philip Galanis, the HLB Galanis accountant and partner, told Tribune Business yesterday that he understood up to 150 Island Luck jobs were in jeopardy, and revealed that major cutbacks were also imminent at another web shop chain he declined to name.
Mr Galanis, an external auditor for several web shop chains and long-time advocate for the industry's legalisation, suggested the Island Luck and Asure Win moves - affecting at least 200 persons - were "only the beginning of the fall-out from the ill-conceived tax policies" imposed on the domestic gaming industry.
"This is exactly what we warned the Government about, and it's going to get worse," he told this newspaper. "Based on what I know, one other chain is going to have to make some serious cuts to stay in operation.
"I think then Government wants to tax them [web shops] out of existence. It's really unfortunate. I guess the Government is going to have to explain to the Bahamian people why it's taken such a radical stance against the domestic gaming operators and not the foreign [casino] operators.
"I think this is only the beginning of the fall-out, the consequences of the ill-conceived and ill thought-out tax policies they've taken against Bahamian operators. I'm really concerned this is only the beginning. They were warned about this, unfortunately, but did not consult."
Brent Symonette, minister of Immigration, trade and industry and financial services, argued during the Budget's 'line item' debate that there was prior consultation with the web shop industry on the new tax structure. He referred to a meeting with one operator, believed to be Island Luck's Sebas Bastian, that was attended by himself, the Prime Minister and Dionisio D'Aguilar, the minister responsible for gaming.
Mr Galanis, though, challenged this consultation claim on the basis that one operator did not represent the entire industry. Describing this as "not sufficient", he questioned why rival web shops and the industry body, the Bahamas Gaming Operators Association, were not invited to be present.
"I think the Government should come clean and say they want to get rid of them," Mr Galanis told Tribune Business of the web shops. "What I found interesting is the Prime Minister said nary a word, not one word, about the domestic gaming industry in his speech closing the Budget debate. It was very telling. Why was that?"
Tribune Business sources this week said the web shop industry has yet to 'pull the trigger' on threatened legal action against the Budget tax hikes, although attorneys Wayne Munroe QC and Alfred Sears QC have been retained to marshall evidence and prepare their case in anticipation of heading to the Supreme Court.
Mr D'Aguilar could not be reached for comment on Island Luck's potential terminations yesterday. He, though, is likely to argue that the web shop industry was already in the process of consolidation, and that sector operators are using the Budget tax increases as 'cover' to accelerate actions they would eventually have taken anyway.
"There are three of the seven gaming houses that are either too small or have been increasingly losing market share over the past three years that, unless something dramatic occurs, I expect them to begin to close locations," Mr D'Aguilar said in his Budget communication last week, although he did not name them.
"So, when it happens, Mr Speaker, I do not want the people to cry shame on the Government. With the advent of technology and the building of bigger and more splendid locations, the smaller players in the market are slowly losing market share.
"Mr Speaker, I expect that, in a few years, the number of locations will be significantly less than they are now as the number houses move more of their business online. Players will be able to sit at home, log on, transfer cash from their bank account into their gaming accounts, game and transfer money back from their gaming account into their bank account. Remember that just four to five years ago there were 635 locations, and now there are 363. That downward trend is expected to continue."
Mr D'Aguilar suggested that the seven licensed web shop chains, earning a collective $50 million in annual profits, have deep enough pockets to withstand the tax increase. And the Government, through labour minister Dion Foulkes, has already urge web shops to hold off on lay-offs and closures - a plea that appears to be falling on deaf ears.
The web shop industry's consultants, Christiansen Capital Advisors, warned that the likely first reaction of Bahamian web shop operators to any tax increases would be to cut costs through closing marginal or unprofitable locations, resulting in significant job losses.
"The combined impact of declining revenues and a higher tax rate will undoubtedly lead to downsizing and the closing of marginally performing locations," the Christiansen study warned.
"In a first quarter 2018 performance review, the largest operator of gaming houses, Island Luck, identified 14 marginal performing locations and 26 marginally performing franchisees representing estimated gross gaming revenue of approximately $37.3 million, or 35 per cent of gross gaming revenues.
"If these new tax rates go into effect, these identified locations will almost certainly be forced to close, and as this review was conducted before these new taxes were proposed, there could be more locations forced to close as well," Christiansen added.
"Island Luck had 54 store locations and 62 franchisees in 2017. Thus, these marginal operations constitute approximately 26 per cent of Island Luck's stores, and 48 per cent of its franchisees.
"If we assume that other operators on the island have a similar ratio of poor performing locations and franchisees, that means that these new taxes will likely lead to the loss of 69 stores and 711 employees at 10.3 employees per store, and $13.5 million in wages and indirect employment of 114 indirect jobs and between $2.1 million in wages."
Under the new tax structure, different portions of web shops' revenue attract different rates as opposed to a single rate falling on an operator's entire revenue.
Mr D'Aguilar said 50 per cent of the industry's $196 million in gross gaming revenue (GGR) falls into the lowest tax bracket, attracting the 20 per cent rate that the web shop sector and its consultants suggest is in line with global benchmarks.
He added that six out of the seven licensed web shops fall into the 20 per cent category, while the 25 per cent, 30 per cent and 35 per cent rates would each apply to a further 10 per cent of industry revenues - meaning that 80 per cent of the industry's GGR would come under the four lowest rates. Only 5 per cent falls into the top 50 per cent tax bracket.