The Proper Care & Feeding of the Golden Goose
In the current model of declining economic conditions in a variety in consumer expenditure, gambling establishments are facing the unique challenge of figuring out how they both maintain profitability as well as remain competitive. These factors are further complicated in the commercial gaming industry with increasing tax rates, and within the Indian gaming sector due to self imposed contributions to tribal general funds, as well as per capita distributions in addition to the growing trend of state imposed fees.
The process of determining how what amount you should “render unto Caesar,” while reserving the requisite funds to keep market share, increase market penetration , and increase profit margins, is a challenging job that has to be properly thought out and executed casino.
It is in this setting and in the writer’s view that includes time and grade hands-on knowledge of the creation and management of these types of investments, that this article discusses methods in which to plan and prioritize strategies for reinvesting in casinos.
While it is axiomatic never to boil the goose who lays golden eggs, it is astonishing how little attention is given to its ongoing care and feeding. With the advent of casinos, developers, tribal councils, financiers and investors are eagerly awaiting the benefits. There is a tendency not to allot enough of the profits towards maintaining and enhancing the assets. This raises the issue of what percentage of profits should go to reinvestment, and towards what goals.
Inasmuch as each project has particular specifics, there aren’t absolute rules or guidelines. Most of the time there are a lot of major casino operators do not distribute their net profits as dividends to shareholders, but instead invest them into improvements to the existing casinos while seeking new locations. Some programmes are supported by additional equity or debt offerings. The tax rate reductions on corporate dividends will likely shift the focus on these methods of financing however, they must still maintain the business prudence that is fundamental to continuous reinvestment.
As a group prior to current economic crisis, publicly held companies had a net-profit ratio (earnings before income taxes and depreciation) which averaged 25% of the income after the deduction of the income tax and interest. On average, almost two thirds of profits are used for reinvestment and asset replacement.
Casinos in lower gross gaming tax rates are more readily able to reinvest in their properties, thereby further enhancing revenues that will eventually help those who pay taxes. New Jersey is a good exampleof this, since it requires specific reinvestment allocations as an incentive to increase revenue. Other states, including Illinois and Indiana that have higher effective rates, are at the risk of decreasing reinvestment that may eventually erode the ability of the casinos to increase market penetration in particular as neighboring states become more competitive. In addition, an effective management strategy can yield higher profit potential to reinvest, resulting from effective operations and favorable borrowing & equity offerings.
The way a casino company decides to allocate its casino profits is an important factor in determining its long-term viability and should be an integral element of the initial development strategy. Although short-term loan amortization or debt prepayment programs may at first appear attractive to quickly come out from being obligated but they could also limit the capacity to reinvest or expand on a timely basis. This is true in the case of any profit distributions that is made to investors, or in the case of Indian Gaming projects payments to a tribe’s general fund for infrastructure/per capita payments.
In addition, many lenders make the error of requiring too much reserves for debt service and placing restrictions on reinvestment or further leverage which can seriously restrict a project’s capacity to keep its competitiveness intact or take advantage of the opportunities that are available.
We aren’t advocating that all profits be plowed-back to the business We encourage the development of an allocation system that takes into account costs that are “real” costs of maintaining the asset, and maximizes its impact.
There are three aspects of the capital allocation that should be considered, as shown below in order of importance.
1. Maintenance and Replacement
2. Cost Savings
3. Revenue Enhancement/Growth
The first two aspects are straightforward to understand because they directly impact in maintaining market position and improving profitability, whereas the third option is complicated in that it has more of an indirect impact that requires an understanding of the dynamics of markets and higher risk of investment. These three aspects are more thoroughly discussed.
Maintenance & Replacement
Maintenance and replacement provisions must be a regular function of the annual budget for casinos, that is a reserve that is based on projected replacement costs of furniture, fixture equipment, buildings, systems and landscaping. We often get annual wish lists which do not correspond to the actual wear and wear and tear of these things. Therefore, it is crucial to actually schedule the replacement period, allocating funds that do not necessarily have to actually be incurred during the year of accumulation. In the beginning, it may not seem appropriate to spend any money on replacement of brand new equipment, but by accumulating amounts to be reserved for recycling purposes, it will ensure that there is no need to hunt for funds at times when they are needed most.
A particular area that deserves attention is the slot machine which have a replacement cycle that has been decreasing in recent years since newer gaming and technologies are developing at a much higher rate and the competitive landscape dictates.
Investments in cost savings programs & systems are, by their very nature , when properly researched, an easier way to use profits allocation funds than almost every other investment. These items can often take the form of brand new energy-saving strategies, labor saving products as well as more efficient buying intermediation, and interest reductions.
There are some caveats to these products, one of which is to analyze the claimed benefits against your particular application, as often times products’ claims are overstated. Lease buy-outs and long term prepayment of debts are sometimes beneficial, particularly if the obligations were entered into at the time of development when equity funds may have been not available. In these situations, it’s crucial to consider the net impact on the bottom line in relation to other possible applications of the funds to invest in growth or revenue-enhancing investments.
One recent trend is the growing popularity of cash-less gaming systems that offer labor savings for fills, counts and hand-pays in addition to being an aid for patrons who do not like to carry around the heavy coin buckets. It is also encouraging multiple game usage.
Revenue Enhancing & Growth
Leveraging is the key driver of any growth or revenue associated investment. It includes the following:
o Patronage Base
o Funds available
O Marketing Clout
The goal is to increase the use of the available asset in order to achieve higher revenue and profitability. Common examples are growing the base amount of patronage spent and broadening the efficient trading radius, by offering additional products/services, such as retail stores, entertainment alternatives, recreational/leisure amenities including overnight accommodation, more restaurants, and of course, expanded gaming.
Anticipation of potential expansion and growth must be fully integrated into the project’s initial master plan so that it can ensure a cohesive implementation of the various elements in a phased-in program, while also allowing for the most minimal disruption to operations. Unfortunately, it’s not always feasible to anticipate changes in the market which is why expansion alternatives should be considered with care.
The Big Picture
Before embarking on any sort of enhancement or expansion program, we strongly recommend first stepping back and looking at your property’s current position in relation to its market and competitive environment. As we have observed in a variety of gaming jurisdictions across the country, often casino ventures that have been operating “fat and happy” for several years find themselves in a slowing down of growth. This can be due to competition stemming from either/both new local casinos or regional venues that have the affect of decreasing patronage from the peripheral markets in the area. Also, the current client base may become bored with their experiences and want better pastures. The history of the Las Vegas strip is testament to the power of continuously “reinventing” oneself.
Our approach to market studies is initially focused on determining which the current facility can penetrate the potential market and in relationship to market share of competitors. In general, this is an analysis of the existing patronage base using information gleaned from the player tracker database, as well as mailing lists, as well as day-part, daily, weekly as well as seasonal and monthly revenue trends.
The data is then integrated to assess the overall market’s potential to reveal what extent certain markets are making use of the facility and the requirements it can meet. What is even more important is that this kind of analysis will reveal markets that aren’t making use of the facility in a more comprehensive manner and the reasons for this.
Our own research has indicated, casino markets are segmented by various characteristics of use-on-occasion, which also includes regular patterns of spending and visitation. The standard methods of market measures, like gravity models, generally take into account the demographics of a population based on revenues achieved in similar markets. However, a occasion segmentation market analysis offers more precise information about the causes precipitating a casino visit and how they relate to the benefits being desired, and the extent of the occasion’s influence on the average amount of money spent and frequency of visits. This type of data mining is more effective than gravity modeling, in that it can aid in determining the types of facilities and positioning strategies needed to draw in each market segmentby assessing their contribution to the total potential. The process has proven to be effective in the restaurant and other leisure time service industries especially in the context of an expanding supply/demand marketplace.
Perhaps even more importantly when looking at the market from an event-based standpoint, you can observe the size and the nature of the competition. This can typically, does not contain other casinos but also other entertainment options and leisure time activities, like clubs, restaurants theatres, restaurants, and the like.
Another aspect of occasion segmentation is the measurement of the overall market characteristics by day-parts which includes income density by the day, weekday daily, monthly and seasonalally. This is especially important data when casino venues want to reduce any greater than normal fluctuations that might be occurring between a slow Monday morning and a busy Saturday night, or suffer from extreme seasonal fluctuations.
When markets are segmented based on their patterns of demand to gain a better understanding, it is possible to be gained about which amenities may help bolster the low demand times, and the ones that can only add to the already maximized peak demand.
Many expansion programs often are prone to complication when they design extra amenities like luxury accommodation and dining establishments based on the peak demand periods. In the end, the overall effect of costs & expenses for these investments can negate the contribution they might make to increased gaming revenues. In fact, “fill-in” markets are the most effective method to increase revenues overall, because they make use of existing capacity. 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 particular market, the formulas cannot measure the influence of other activities not based on gaming that might still generate casino traffic.
Relevant data on the use of restaurants by the general public, entertainment, and weekends can be the foundation on the basis of which amenities are designed to cater to these markets and, in turn it can increase the amount of people visiting. Whereas many of these patrons might or might not use casinos and their exposure to this potential of the casino could encourage their use as well as creating an additional profit center.
In addition, when we look at in the direction of Las Vegas paradigm, more and more casinos are generating at least more as gaming revenues. As their restaurants and hotels are not as subsidized, and with their increasing retail components contribute significantly towards the overall bottom line.
Once equipped with a basic understanding of the dynamics of the market as well as the current market shares/penetration rate in relation to the mix of competitors, and the overall occasioned-use of market resources, a matrix could be created to set both the demands and the supplies. This function seeks to identify areas where there is a lack of demand or oversupply, which provides the basis for the creation of the appropriate amenities, upgrades, and expansion requirements and strategies.
Essentially there are two types of upgrade strategies that are subsidized and profit-centers. Subsidized elements could include adding or improving facilities that increase the current market share of gaming and thus having a direct impact on increasing casino revenues and profit centers are intended to leverage current patronage patterns with additional spending opportunities, and having direct impact on gaming activity. While many of the traditional amenities, such as restaurants, hotels, retail stores, entertainment venues and recreation facilities may be included in one or both of these categories, its essential to differentiate between them in order to be able to clearly define the criteria for design and development.
As previously mentioned, Las Vegas continually seeks to improve itself as a means to boost repeat visits, which, in turn, creates an effect of snowballing as each venue must be able to keep pace with its neighbor. To some extent upgrading programs, that may include creating a new and fresher design, functions similar to an insurance policy for slipping revenues, and do not necessarily mean incremental growth per se. Don’t confuse them with the replacement of worn carpeting and recycling of slot machines, upgrades should attempt to generate excitement for the facility’s design, ambiance, finishes, layouts, and overall décor.
The expansion of capacity already in place is not a result of market analysis, and more the result that of “making hay while the sun shines,” based on a thorough understanding of the visitation pattern densities. The back-up of players for gaming positions and restaurant tables can be both positive and bad, based on when they occur and the frequency at which they occur. In the case of high per position, net win rates aren’t always an indication of a prospering casino, as they could also mean the loss of opportunities because of the insufficient amount of games. Conversely, additional positions are unlikely to always produce the same results.
When determining the capacity of an entirely new facility, it is crucial to thoroughly analyze demand patterns in their respective day-part components that will maximize penetration during the peak periods and reduce inefficiency to when the price of additional capacity are exceeded by its net income potential.
Food & Beverage Amenities
In the majority of casinos, restaurants are “loss leaders,” designed to keep and attract patrons to casinos by offering low prices and excellent value. Nevertheless, they are able to both widen occasioned-use of the casino, while also being potential profit centers.
In Nevada the only state in which detailed historical F&B departmental results have been made available for casinos properties that have gaming revenues of between $20M to $200M showed food-related operations generating a net departmental loss of 1.5% of sales in 2001 which was nearly a 14% loss in 1995.
Much of this major turnaround is due to the increase in restaurants, particularly more specialty/upscale eateries, which has boosted sales between 20% and 20% gaming revenues in 1995 to nearly 27 percent in 2001. Moreover, food costs have been reduced sharply 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 facility within the casino can be a way to attract diners to the tourist market while the casino benefits from its close proximity. So, when market conditions suggest that a casino’s restaurant needs to change arrangement, the main issues to be addressed is how can they be designed in order to please the current customers, expand the use of occasioned services and increase profit.
With turnkey hotel development costs in the range of $75K-$350K per room marketing strategy had better be well studied. Yet we see many such projects that are undertaken without much understanding of the market dynamics and economic impact.
Nationally, according to our most recent survey there’s 724 casino around the country. They are comprised of 442 commercial businesses, roughly half of which are located in Nevada as well as 282 Indian gaming venues, of which 209 offer most, but not all of Las Vegas type (Class III) games. About 58% of casinos in the commercial gaming industry have co-located hotels, compared with 37 percent from class III Indian gaming venues, even though they have similar amounts of games.
The high proportion of hotels in the commercial market is due to a few gaming jurisdictions that require these hotels; for instance, Nevada (for granted licenses that are unrestricted) as well as New Jersey. Additionally, a large portion of Nevada demand for hotels comes from beyond a daytrip radius and requires overnight accommodations to increase market share. In averaging these states from the entire, the percentage of casinos that have hotels decreases from 50% to just 50% and the average being 312 rooms and 1,183 games.
The main benefit of gambling establishments are their capacity to attract gaming markets from beyond the typical day trip distance, but also offering the advantage of having a “captured” market (Casinos with Hotels). In addition, guest rooms can provide another benefit for the use of player club points. Hotels also expand the scope of a casino’s event-based use by providing non-gaming leisure activities & amenities and are complemented by the readily access to gaming, while also representing another profit center (Hotels with casinos). Additionally, within a traditional accommodation setting, a hotel or casino can be competitive due to the thanks to its additional entertainment features.
Among the major Las Vegas properties there are more hotel rooms than games and the city has shifted from a casino destination into a resort and convention center. As a result, these hotels have increased their profit and investment return by not needing to offer low rates to attract gamers. While some regions, like Laughlin and Reno aren’t able to have the mass appeal of a Las Vegas, still find it necessary to boost their hotel’s investment by earning casino income because of low room rates and the large fluctuations in visitor numbers during the season.
In configuring a casino hotel development , it is crucial to be aware of the market and financial dynamics , and how they impact on the overall gaming revenue and profit. Within the free-standing (non-casino) hotel industry, financing terms typically fall within a 15 to 20 year amortization plan, with a ten year balloon or refinance, and break-even that is between 65% and 70% occupancy. Casino-type lodgings typically are occupied at high levels during weekends, however very low levels during the weekday. Therefore, it’s not necessary to “build a church for Easter Sunday,” keeping in mind the general efficiency of the asset.
Furthermore, if the goal is to attract additional gaming patrons from a larger geographical area, it’s important to evaluate the cost of any hotel subsidies versus the potential growth in the gaming revenue. A new 200 room hotel at a casino which already has around 20,000 weekend visitors could only be adding up to 2% or 4% additional players, while also exposing itself to higher costs. In regards to occasioned-use, particularly for weekend visitors and tourists casino hotels could be competing against other resorts in the region.
Ideally, these facilities, even if they are not in markets with insufficient local/day-trip markets (e.g. Laughlin) and should be set up in accordance with their non-gaming related and off-peak period support , so that they can maintain appropriate prices for rooms as well as adequate levels of profit. Also, they must include amenities these markets are seeking and, where appropriate: conference and convention facilities as well as outdoor and indoor recreational facilities.
Although they are a smaller marketplace, RV Park facilities are an investment with less risk in hotels which can still provide many of the same advantages. Based on the most recent statistics that show there are over 9 million households in the United States that own RVs, and represent one of the ten households that own a vehicle. A large portion of these households are the 55 and over age groups, who have more than the average gaming propensity and annual income.
RV Park development costs are considerably lower than hotel development costs They typically see frequent use throughout the year, with the most activity during summer in resorts with temperate climates, and during the winter months in the “snowbird” areas.
Retail/Outlet shopping is gaining a large 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. In the Forum Shops at Caesar’s Palace in Las Vegas enjoys the highest per square foot of all malls that sell retail within the U.S., and the growth in retail sales at the mall is significantly surpassing the gaming revenue. The presence of these shops serves as both an activity to the city’s 35 million visitors annually, who are now spending less than 4 hours per day actually playing, as well as an important source of profit that is able to leverage the number of visitors.
In less resort-style market, outlet malls are powerful traffic generators from where a casino facility can draw crowds. On a smaller scale, casinos can widen their occasioned-use by offering unique and indigenous shopping that is specifically designed to draw those who are part of the “adjunctive” daytripper market. The size and nature of these stores must be adjusted to the needs of the market, the current trends in visitor numbers and the local atmosphere.
Even though entertainment is a staple within casinos, dating back to those Rat Pack days in Las Vegas and today’s massive concert/arena venues and specialty shows Their market dynamics are frequently under-appreciated. They’re simultaneously diverting and attractions, profit centers as well as public relations instruments. However, they could result in significant losses, which is why they should be carefully assessed to determine their best configuration.
Since the majority of major events taking place during weekend timeframes, the affluent crowds may not have any significant impact on an already busy time. Therefore , it is imperative to ensure that the event is organized to be at least able to make a profit or generate a profit. While this is somewhat apparent, the most central issue is the venue’s ability to also make the most of its initial and investment. Outdoor facilities can sharply reduce the cost of construction, however they also are susceptible to weather fluctuations and seasonal use. In addition, tents for parties and temporary structures typically are not as well-known of a permanent location that is an integral element of the casino’s facility.
There is much attention nowadays being paid to the construction of recreational facilities at casinos, specifically those that are associated with resorts. Golf courses are an atypical addition to many resorts and numerous Indian communities have the benefit of accessing the huge land areas as well as water rights that these types of projects require.
In addition to the other ways to increase revenue through reinvestment mentioned here, recreational facility development should be evaluated in the context of their ability to bring in more casino patrons and/or serve as profit-making center. Golfers have traditionally an intense gaming habit, the connection between golf and the casino is not on the same page, considering the length of time required to complete a typical round. Moreover, even under the most efficient utilization rates the average 18 hole golf course is only able to accommodate approximately 140 people daily, while the average national figure for all seasons is 100 round per day. This is not a lot of players added to the casino, even if all gambled. This is especially considering the cost of a standard course that is, without land, and ranging from $5 million to $15 million.
However, a golf course’s development in conjunction with a resort package and/or to meet local market demand could bring 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 home sites, which can have a particularly higher value than non-golf course properties. Given the trust status of Indian land, this might be a little problematic for reservations areas, unless any kind of lease for long duration can be reached with the home owners.
Planning/Financing & Implementation
Once all of the salient market elements have been considered and weighted against their cost vs. benefits, a comprehensive reinvestment & expansion program will begin to develop. A design & construction team must be formed that can help further interpret the program in terms of the innovative and valuable engineering input, while also maintaining its market-leading position and financial strategies.
It is crucial that the plan demonstrate how each element will be integrated into the overall facility fabric and how it will be financed. Certain funding sources can be derived from reserve profit allocations as well as other funding sources that are independent of additional debt that has had its amortization considered in the overall feasibility analysis.