Reinvestment Strategies In Casino

The Proper Care & Feeding of the Golden Goose

In the current paradigm of declining economic conditions across a broad spectrum of consumer spending, casinos are facing an unique problem in determining how they both maintain profitability while also remaining competitive. These factors are further complicated within the commercial gaming sector with increasing tax rates, as well as within the Indian gaming sector due to self-imposed tribal contributions to general funds, as well as per capita distributions, and a growing trend in fee-based taxes that are imposed by states.

The process of determining how the amount of money to “render unto Caesar,” and ensuring that you have the necessary funds to maintain market share, expand market penetration , and increase profits, is a challenging task that must be well organized and carried out casino.

It is in this setting and the author’s viewpoint that is based on time and grade-based experience in the design and administration of these kinds of investments the article provides methods for planning and prioritize a casino reinvestment strategy.

Cooked Goose

While it is axiomatic that you should not cook the goose that lay golden eggs, it is remarkable how little consideration is often given to its ongoing maintenance and food. When the new casino, tribal councils, investors and financiers are eager to reap the rewards . Unfortunately, there is a tendency to not give a fair share of the money to the maintenance and improvement of the assets. Thereby begging the question of just how much of the profits should be allocated to the reinvestment process, and to which goals.

In the sense that each project comes with unique set of specifics, there aren’t absolute rules or guidelines. For the most part, many of the major casino operators do not distribute net profits in dividends to their shareholders, but instead invest in making improvements to their current venues, while looking for new venues. Some initiatives are also supported by additional debt instruments and/or equity stock offerings. Tax rates that are lower on dividends from corporations will shift the emphasis of these financing methods but they will still adhere to the fundamental business prudence of continuing investment reinvestment.
Profit Allocation

In the aggregate prior to the current economic conditions, the publicly-owned companies had a net-profit ratio (earnings before income taxes & depreciation) which averaged 25% of earnings after the deduction of tax on revenue and interest. On average, almost two-thirds of the remaining profits are utilized for investing in assets and for replacement.

Casinos operating in low gross gaming tax rates can more easily return capital to their properties, thus boosting revenues that can ultimately increase the tax base. New Jersey is a good exampleof this, since it requires certain reinvestment allocations, which is an increase in revenue. Other states, such as Illinois and Indiana that have higher effective rates, are at the risk of delaying investment, which may ultimately reduce the casino’s ability to expand market penetrations in particular as neighboring states are more competitive. Moreover, effective management can generate higher available profit to invest, which is a result of efficient operations as well as favorable equity and borrowing options.

The method a casino business chooses to allocate its casino’s profits is an important factor in determining its long-term viability and should form an integral element of the initial development strategy. While loan amortization and debt prepayment programs might initially appear appealing to swiftly come out under the obligation however they can restrict the ability to invest or expand on a timely basis. The same is true for any profit distribution for investors or in the case of Indian gaming projects, distributions to the general fund of the tribe for infrastructure or per capita payments.

Furthermore, many lenders commit the mistake of requiring excessive reserves for debt service, and also imposing limitations on reinvestment and further leverage , which could severely limit a given project’s ability to remain competitive or take advantage of the opportunities that are available.

Whereas we are not advocating that all profits be plowed-back to the company We encourage the consideration of an allocation plan which takes into consideration costs that are “real” costs of maintaining the asset, and maximizes the impact of this program.

Establishing Priorities

There are three key categories of capital allocation that need to be considered, as shown below in order of importance.

1. Maintenance and Replacement
2. Cost Savings
3. Revenue Enhancement/Growth

The first two points can be easily understood because they have a direct affect on maintaining market positioning and enhancing profitability. However, the third is somewhat difficult to comprehend because it has more of an indirect affect which requires an understanding of the dynamics of markets and greater investment risk. The entire subject matter is discussed further.

Maintenance & Replacement

Maintenance and replacement plans should be an integral part of the annual budget of the casino, which is a fixed reserve based on the projected replacement cost of furniture, fixture, equipment, building, systems, and landscaping. It is not uncommon to get annual wish lists which aren’t related to the actual wear & wear of these items. Therefore, it is crucial to plan the replacement cycle, allocating money that does not require a purchase during the year of accumulation. In the beginning, it might not be appropriate to spend any money for the replacement of brand new assets, however by accruing sums to be saved for their eventual recycling will avoid having to scurry for the funds when they’re most needed.

One of the areas that warrants special attention is the slot machine and their replacement cycles have decreased in recent months due to the fact that newer games and technology are evolving at a faster rate as competition dictates.

Cost Savings

Investment in cost savings programs and systems is in their nature, and if adequately researched an investment that is less risky profits-allocation funds than every other investment. These can typically take the form of brand new energy-saving strategies as well as products for labor efficiency that are more efficient in purchasing intermediation, as well as interest reductions.

They come with a few caveats and one of them is to thoroughly analyze their touted benefits against your particular use, as often the claims made by the company are exaggerated. Lease buy-outs, as well as long-term debt prepayments can sometimes be beneficial, particularly when the contracts were signed at the time of development when equity funds may have been not available. In these cases it is important to look at the impact of this strategy in the end when compared to other applications of the funds for growth and revenue enhancement.

One of the recent trends is the growing acceptance of cash-less slots which offer the opportunity to save on labor costs for fills, counts and hand-pays in addition to being an aid to players who don’t like to lug around those cumbersome coin buckets. It is also encouraging multiple game usage.
Revenue Enhancing & Growth

Leveraging is the primary catalyst of any revenue enhancing/growth associated investment. It includes:

o Patronage Base
o Available Funds
o Lands
A Marketing Clout
o Management Experience

The principal is to leverage the potential of an assets to increase revenues and profitability. Typical examples include increasing the base amount of patronage spent and expanding the trade distance by offering other products or services, like entertainment options, retail stores such as leisure and recreational facilities, overnight accommodations, more restaurants and, obviously, increased gaming.

Master Planning

The anticipation of future expansion and growth must be included in the initial master plan so that it assure cohesive implementation of the various elements of a phased-in programme and also allows for the least disruption to operation. Unfortunately, it’s not always possible to predict market trends thus expansion alternatives have to be considered carefully.

The Big Picture

Before embarking on any sort of expansion or enhancement plan it is recommended to take a step back and assessing the property’s present positioning relative to its market and competition. We’ve observed that in a variety of gaming jurisdictions across the country, often casino operations that have been “fat and happy” for several years, discover themselves in a period of no growth. Sometimes , this is due to competition from both new regional or local casinos which have the effect of decreasing patronage from the peripheral market areas. Additionally, the current customer base may get bored of their current experience and may seek newer opportunities. The history of the Las Vegas strip is testament to the success of continually “reinventing” oneself.

Our approach to market studies is primarily based on determining the extent to which the present facility is able to penetrate the market, and also in relation to any competitive market shares. This typically involves an analysis of the current patronage pool based on information gleaned from the players tracker database, as well as mailing lists, as well as the day-part, daily, weekly and monthly revenues.

The data is then integrated to assess the overall market potential to indicate whether markets are making use of the facility and the requirements it fulfills. What is even more important is that this type of analysis will indicate those markets that aren’t using the facility to the fullest extent, and why.

Occasion Segmentation

As our proprietary studies have found, the markets for casino are segmented by various characteristics of event-based use, as well as the typical patterns of spending and visits. The conventional methods for market measures, like gravity models, generally take into account the demographics of a given population, with respect to the revenues that are generated in similar markets. However, a segmentation of events market analysis reveals more detailed details regarding the motives that lead to a visit to a casino and how they relate to the benefit desired, and the extent to which the occasion determines average spending and visitation frequency. This type of data mining is more effective than gravity modeling in that it could help determine the type of facilities and positioning strategies needed to draw each market segment, by measuring their contribution to the aggregate potential. This technique is being used successfully in the restaurant and other leisure time service industries particularly in the context of a growing supply/demand marketplace.

Perhaps more important considering this market through an occasioned-use view, we can see the scope and nature of the underling competition. It does, often, does not just include other casinos, as well as other entertainment and leisure activities like clubs, restaurants theatres, restaurants, and the like.

Demand Density

Another aspect of occasion segmentation is in measuring general market characteristics using day-parts which includes income density by day, day per week as well as monthly, weekly and even seasonally. This is crucial information when casino venues are seeking to limit any more than normal fluctuations that might occur between a quiet Monday morning and a packed Saturday night; or that have extreme seasonal fluctuations.

Through separating markets based on their demand patterns, a better understanding can be gained about which amenities could help to boost the low demand periods, as well as those that may only add to the already high-demand peak demand.

A lot of expansion programs make the mistake of configuring extra amenities like luxury accommodations and restaurants based on the peak demand times. As a result, the net effect of cost and expenses associated with these investments could negate the contribution they might make to increased gaming revenues. Instead, “fill-in” markets are the most efficient means to boost revenues overall as they utilize existing capacities. Las Vegas has achieved great success in creating strong mid-week activity through promotion of its extensive conference/convention facilities.

Amenity Driven Markets

Another benefit of utilizing occasion-segmentation is its ability to also indicate the potential impact certain amenities have on “impelling” visitation. While gravity models study the characteristics of gambling-related spending of a given market area but they cannot quantify the effect of other non-gaming-related activities that may nonetheless generate casino traffic.

Important data relating to the frequency of use by people who go to restaurants entertainment, entertainment, and weekend getaways can often form the foundation on how to design amenities specifically for these types of markets and in doing so increasing the number of visitors. Although many of these people may or may not utilize casinos and their exposure to this possibility of using it could increase their usage in addition to creating an additional source of income.

Looking at the Las Vegas paradigm, more and more resorts are producing nearly, if certainly more, non-gaming revenues than gaming revenue; and their hotels and restaurants are not as subsidized, and with their expanding retail component are a major contributor in the final line.

Program Development

Once equipped with a basic understanding of market dynamics as well as the facility’s market shares and penetration rates in relation to the competitive mix and the general usage that the marketplace is able to provide, an matrix can be constructed that balances an equilibrium between the market’s demand and supply. This is a method to determine areas that are not being met demand or oversupply, which serves as the basis for the creation of suitable amenities, upgrades, and expansion strategy and criteria.

Impact Criteria

There are two kinds of strategies for expansion and upgrade: subsidized and profit-centers. Subsidized elements could include adding and/or improving amenities that will increase current gaming market penetration/shares that will consequently have an immediate influence on the growth of casino revenues; while profit centers are specifically designed to boost existing patronage patterns, providing more spending possibilities, as well as having an in-direct effect on gaming activity. While many of the more conventional amenities, such as hotels, restaurants, retail establishments, entertainment venues, and leisure facilities could belong to one or both of these categories. However, it’s important to make the distinction in order to be able to clearly define the criteria for design and development.

Upgrading/Expansion

As has been previously discussed, Las Vegas continually seeks to improve itself to boost repeat visitors, which, in turn, creates a snowballing affect as each location must stay on top of the other venues. In a way, upgrading programs, such as creating a new and fresher design, functions as an insurance plan against declining revenues. They do not necessarily relate to any increase in revenue per se. It is not to be confused with new carpeting replacement and recycling of slot machines, the upgrade plan should try to bring new energy into the building in terms of ambiance, quality of finishes, layouts, and overall design.

The expansion of capacity already in place is less about market analysis, but more of an act in “making hay while the sun shines,” based on an understanding of visitation pattern densities. Patron back-ups for gaming positions and restaurant tables could be good or bad, based on the time they occur and the frequency at which they occur. The highest per position daily net win numbers are not always a sign of a profitable casino, as they could also mean lost opportunity because of an absence of games. On the other hand, additional positions are not necessarily going to yield similar averages.

When determining the capacity of the construction of a new facility, it’s important to thoroughly analyze demand patterns into their respective component parts during the day, which will ensure maximum capacity during peak periods while minimizing inefficiency , the point where the costs of the additional capacity are greater than its net income potential.

Food & Beverage Amenities

In the majority of casinos, dining facilities offer “loss leaders,” designed to keep in place and draw customers to casinos with low costs and great value; yet they also have the potential to increase the number of occasions that people can use the casino, as well as providing potential profit-making opportunities.

In Nevada it is the only state in which detailed historical F&B departmental results is available to casinos, properties with gaming revenues averaging between $20M-$200M reported food operations having the department lose 1.5% of sales in 2001, versus almost a 14% decline in 1995.

Much of this major turnaround is due to the growth in the number of food establishments, particularly upscale/specialty restaurants, which has increased sales from 20% of gaming revenues in 1995 to close to 27 percent in 2001. Moreover, food costs have decreased dramatically from 45percent in 1995 to 35% in 2001.

As the previous discussion on occasion-segmentation revealed, a consumer’s choice of a casino visit can sometimes compete with other entertainment/leisure time activities, including dining out. The presence of a restaurant that is market-relevant establishment within the casino could serve to attract the dining-out customer, with the casino benefiting from its proximity. When market conditions call for that a casino’s restaurant needs to change layout, the issues to be addressed are how they can be designed to meet the needs of the current clientele, improve occasioned-use, and improve profits.

Lodging Elements

With the cost of turnkey hotel development ranging between $75K to $350K per room, a market positioning strategy had better be well studied. However, we have seen many projects being developed without knowledge of market dynamics and economic impacts.

Nationwide, according to our most recent research, seven24 casinos are operating throughout the country; comprised of 442 commercial operations, about half of which are in Nevada as well as 282 Indian gaming venues, of which 209 have the most if not all, of Las Vegas type (Class III) games. Nearly 58% casinos in the commercial gaming sector have hotels that are co-located, as compared with 37% for classes III Indian gaming venues, despite them having the same average amount of games.

The high preponderance of hotels within the commercial sector owes to a few gaming jurisdictions that require hotels, including Nevada (for the unrestricted licence) in addition to New Jersey. Furthermore, the majority of Nevada market demand stems from outside a daytrip’s radius, making overnight accommodations necessary for gaining market share. When extrapolating these states from the overall, the share of all commercial casinos with hotels is reduced from 50% to just 50% with as little as 312 rooms & 1,183 games.

One of the main advantages of gambling establishments are their capacity to attract gaming markets from beyond the typical day trip range, as well as having some sort of “captured” market (Casinos with Hotels). In addition, guest rooms can be another perk-use for player club points. Hotels can also increase a casino’s occasioned-use by offering non-gaming leisure activities & amenities and are complemented by the readily accessibility of gaming, and being a profit-making center (Hotels with Casinos). Furthermore, within a conventional accommodation setting, a hotel or casino is competitive by due to its entertainment features.

In the main Las Vegas properties there are more hotel rooms than games, as the city transits from being a gaming hub to becoming more of a resort and convention center. By doing this, the properties increased their hotel profitability and investment returns by not having to offer low prices to attract players. However, certain areas such as Laughlin and Reno that do not have the mass appeal of a Las Vegas, still find it necessary to supplement their hotel’s investment by generating casino revenues, due to low room rates and large seasonal visitation fluctuations

In determining the best way to structure a casino construction, it is important to understand the market and financial dynamics and their impact on overall gaming revenue and profit. In the freestanding (non-casino) hotel sector, the terms of financing are usually over 15 to 20 years amortization schedule with a ten year balloon or refinance, and break-even that ranges from 65% to 70 percent occupancy. The typical casino-based lodging components have high occupancy on weekends, however lower levels during the weekday. Therefore, it’s not necessary to “build a church for Easter Sunday,” keeping in mind the efficiency of the asset.

Furthermore, if the goal is to attract additional customers to casinos from a greater area of market, it’s essential to consider the expense of any hotel subsidy versus the possibility of a rise in profits from gaming. A 200 room hotel at a gambling establishment that is already producing around 20,000 weekend visitors could only add 2to 4 percent more customers, and being exposed to greater costs. With regard to the use of occasioned, particularly among weekenders and tourists, casino hotels may also be competing with other resorts in the area.

Ideally, these kinds of facilities, even if they are not in markets with insufficient local/day-trip markets (e.g. Laughlin) they should be designed according to their non-gaming related and off-peak support so that they can maintain appropriate room rates and adequate levels of profit. They should also include those amenities that these markets are looking for, including, where applicable: conference and convention facilities, and indoor/outdoor recreational elements.

Albeit more of a niche marketplace, RV Park facilities are an investment with less risk in hotels but they can provide certain benefits. According to the most current data, there are more than 9 million families in United States that own RVs and make up one of each ten car-owning households. Many of these households include the 55 and over age group, which have an over-the-average gaming propensity , as well as an annual income.

RV Park development costs are significantly lower than hotels and resorts, however they generally have a frequent use throughout the year, with the most activity in the summer months in resorts with temperate climates, and during the winter months when they are located in “snowbird” areas.

Retail/Outlet Shops

Retail/Outlet shopping is now gaining important presence at casinos across the country. First represented by casino logo shops and a few high-roller/jackpot-winner positioned boutiques, these stores have now grown into major malls and entertainment centers. They are the Forum Shops at Caesar’s Palace located in Las Vegas enjoys the highest per square foot of all malls with retail stores in the U.S., and the rise in retail sales of the town is higher than the revenue from gaming. The presence of these shops provides both a source of entertainment to the city’s 35 million annual visitors, which are spending less than four hours per day actually playing, as well as a major source of revenue which leverages the visitor base.

In less resort type market, outlet malls are powerful traffic generators from where casinos can gain patrons. On an individual basis, casinos can widen their occasional-use by providing unique and distinctive shopping experiences that are specifically designed to draw people from an “adjunctive” daytripper market. The extent and characteristics of these stores should be adapted to the prospective market, the current trends in visitor numbers as well as the local ambiance.

Entertainment

Even though entertainment is a staple within casinos, dating from early Rat Pack days in Las Vegas and today’s massive arenas and concert venues, as well as specialty shows; their market dynamics are often misunderstood. They can be diversions, attractions, profit centers and public relations instruments. They can however, cause significant losses and therefore should be well examined to determine the most appropriate design.

Since the majority of major events occurring during the weekend period, the audience that is attracted might not make a huge impact on a likely already busy period. So it is essential to ensure that the event is designed that it is able to break even or turn a small profit. Although this is self evident, the more significant issue is the venue’s capacity to amortize its initial development cost investment. Outdoor venues can dramatically cut costs for construction, but also have a tendency to be subject to weather vagaries and seasonal usage. In addition, tents for parties or temporary structures do not have the cache of a permanent venue which is an integral component of the casino facility.

Recreational Facilities

There is a lot of focus nowadays being paid to the construction of facilities for recreation at casino venues, especially those connected to resort projects. Golf courses are an atypical component of many resorts and many Indian communities have the benefit of being able to access the ample land areas and water rights these kinds of projects require.

Similar to all the other options for reinvesting in revenue that are discussed in this article, recreational facility development must be considered in the context of its ability to attract more casino patrons or serve as an opportunity to earn money. Although golfers generally have an extremely high level of gaming, the association between golf and gambling isn’t as synchronized, given the amount of time required to complete a typical round. In addition, even under the most efficient utilization rates the average 18 hole golf course is only able to accommodate around 140 players daily, while the standard for the nation in all-year-round environments is approximately 100 rounds per day. This isn’t a huge number of extra players at an establishment, even if every one of them gambled, especially considering the cost of an average course that is, without land, and ranging from $5 million and $15 million.

However, a golf course’s development to be part of a resort package or to fill a local market demand may provide numerous non-gaming benefits. From a resort development standpoint, a golf course as well as other recreational elements can add to the facility’s competitive positioning, to the point where its development/operating costs can be recaptured through higher room rates/green fees. Some traditional golf courses “pencil-out” when incorporating fairway homes, which are a particularly higher value than non-golf course locations. With regard to the status of trusts for Indian lands, this can be problematic for reservation areas, unless any kind of long term land leases could be negotiated for homeowners.
Planning/Financing & Implementation

Once all of the salient market conditions have been assessed and weighted against their cost against. benefits, a comprehensive expansion and reinvestment program is able to begin taking shape. A design and construction team should be assembled to further help interpret the program’s objectives in terms creativity and value engineering, while also maintaining its current market position and financial strategy.

The program must illustrate how each element is integrated in the overall fabric and how it will be funded. A portion of the funding may come from reserved profit allocations, and others are funded independently by additional debt, whose amortization has been factored into the overall project’s feasibility analysis.

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