lottery controversy stuns iowa retailers

Operators have lost a major profit center now that the governor has banned the popular TouchPlay machines.

By Ross Markman, Retail Relations Editor

Eight miles from the tiny town of Larchwood, Iowa (pop. 788), Fran Zuraff faces a major competitor for customer dollars—South Dakota.

Competition wasn’t quite as stiff until recent months, when Zuraff and hundreds of fellow Iowa retailers had been banking on a relatively new profit center, TouchPlay lottery machines, to help recoup revenue lost at the pumps.

That all changed, however, when Iowa Gov. Tom Vilsack—urged by a coalition of mayors, town council members and lawmakers—banned TouchPlay from the state, just a few years after those same legislators approved its implementation.

The Larchwood Mini Mart, which Zuraff has owned for the past 12 years, operates under the ConocoPhillips brand and earned an extra $400 to $500 in net margins per month from TouchPlay.

Some retailers face more substantial losses as a result of the governor’s flipflop. One particular store owner, according to a c-store operator who asked not to be named, risks losing his home and going bankrupt after investing in several of the TouchPlay machines.

“If the state is so concerned about gambling away money that should go to feeding their children, this is not going to stop those people from playing these machines,” Zuraff said. “If they want to play, they’re going to go to South Dakota.”

Nearby Sioux Falls, S.D., is home to several casinos that will reap the gambling revenue that, prior to TouchPlay’s removal, stayed in Iowa.

Critics of TouchPlay argued that the glorified casino slots ultimately would lead customers down the path of gambling addiction, bankruptcy and depression. Lottery officials and c-store owners, however, contended that the convenience industry is ideal for TouchPlay because stores already provide an age-restricted environment (see “A Touch of Controversy,” March 2006, p. 8).

Under the ban, which goes into effect early this month, stores with TouchPlay machines were given 45 days to remove them, with the threat of hefty fines—a 65% excise tax on revenues—if they don’t comply. Some retailers said they will respond through litigation, arguing that they made a substantial investment in TouchPlay after a commitment by legislators to implement the program.

Zuraff is one of the fortunate c-store owners; she opted to lease two machines from the manufacturer instead of purchasing them. As part of the lease agreement, she kept only 25% of the profits, but also isn’t strapped with the financial burden of owning useless equipment.

“It’s going to be a disaster for people who bought the machines,” she said.

Larry Bentler, president of Houghton, Iowa-based Jet Gas Corp., said most retailers he knows leased the machines. Jet Gas operates eight stores in the rural southeast region of Iowa.

Although Bentler didn’t invest in the machines, his chain is losing a nice chunk of profits with the removal of TouchPlay— as much as $3,000 per month at one particular store.

“I saved myself a couple hundred thousand dollars by not investing in the machines,” Bentler said. “I really don’t have damages other than lost profits.”

Many retailers expressed distrust for lawmakers, just a few years after the legislature teamed with private industry to generate the revenue stream. The state received 24% of net dollars from the more than 6,000 machines scattered throughout Iowa, which, according to the Des Moines Register, totaled more than $242 million since July 2005.

“It’s fine if [lawmakers] want Iowa to be pristine, but then let’s do away with the lottery and the casinos,” said Mark Nelson, president of Spencer, Iowa-based Dyno Oil Corp., which operates nine convenience stores in the northwest region of the state. Dyno Oil had a total of 32 TouchPlay machines, with profits in excess of $20,000 per month companywide.

“I don’t think anyone anticipated the growth that it would have,” Nelson said. “Then, all of a sudden, the casino interest said, ‘Oh my gosh, we have to put a stop to this.’”

Zuraff echoed that sentiment, and said she ironically had more customers use the machines in the first few days following the ban than had used them before the governor approved their removal.

“It is really sad that the state of Iowa allowed them to be put in, and now they’re taking them out,” she said. “It’s just nasty, and leaves me with little faith in our government.”

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