The Proper Care & Feeding for the Golden Goose
Under the new paradigm of declining economic conditions in a variety of consumer spending, casinos are facing the unique challenge of figuring out the issue of how to maintain their profit while remaining competitive. This issue is made even more difficult within the gaming industry as tax rates rise, and within the Indian gaming sector by self-imposed tribal contributions to general funds, and/or per capita distributions, and an increase in taxes imposed by the government.
Deciding how much to “render to Caesar,” while reserving the requisite funds to maintain market share, grow market penetration and increase ทดลองเล่นสล็อต profits, is a daunting task that must be well designed and implemented.
In this light and from the perspective of the author, which is based on time and grade-based experiences in the planning and management of these kinds of investments that this article relates ways that can be used to plan and prioritize the casino reinvestment strategy.
Although it would seem axiomatic never to boil the goose who lays the golden eggs, it is amazing how little attention is often the time given to its proper feeding and care. With the advent of the new casino, tribal councils, investors and financiers are eager to reap the rewards and it is common not to put a significant portion of the profits towards maintenance and improvement of the asset. This raises the issue of how much of profits should be devoted to investment, and for what objectives.
Since every project is unique and has specific set of circumstances There aren’t any hard and speedy guidelines. The majority of the time most of the major commercial casino operators do not pay net profits as dividends to their stockholdersbut instead invest them into improvements to their current venues, while in search of new locations. Certain initiatives are also funded through additional equity or debt offerings. The lowered tax rates for corporate dividends could shift the emphasis on these methods of financing and will not affect the fundamental business prudence of continuing reinvestment.Profit Allocation
As a group, and prior to the current economic conditions, the publicly-owned companies had a net profit percentage (earnings before income tax and depreciation) which averaged 25% of income after deduction of tax on revenue and interest payments. On average, almost two thirds of profits are used for reinvestment and asset replacement.
Casinos operating in low gross gaming tax rates can more easily return capital to their properties, which in turn increases revenues that can ultimately help on the base of taxation. New Jersey is a good example, as it mandates specific reinvestment allocations as a revenue stimulant. Other states, including Illinois and Indiana with higher effective rates, are at the risk of cutting down on investment in reinvestment. This could ultimately diminish the capacity of casinos to increase market penetration, especially as neighboring states are more competitive. Furthermore, a well-run management system can generate higher available profit in reinvestment, which is a result of both efficient operations and favorable equity and loan offerings.
The method a casino business chooses to allocate its casino’s profits is a key element in determining the viability of its business over time, and should form an integral part of the initial strategy. While short term loan amortization/debt prepayment programs might initially seem desirable so as to free yourself from under obligation but they could also limit the capacity to reinvest or expand in a timely manner. The same is true for any distribution of profits that is made to investors, or in the case of Indian gambling projects distributions made to a tribe’s general fund to pay for infrastructure or per capita payments.
Moreover, many lenders make the mistake of demanding excessive debt service reserves and place limitations on reinvestment and additional leverage that could seriously restrict a specific project’s ability to maintain its competitiveness and/or make the most of opportunities.
Whereas we are not advocating the reinvestment of all profits into the business we do encourage the creation of an allocation system that considers the “real” costs associated with maintaining the asset , and maximizes its impact.
There are three areas of capital allocation that need to be taken into consideration, as highlighted below and in order of importance.
1. Maintenance and Replacement
2. Cost Savings
3. Revenue Enhancement/Growth
The first two aspects are easy enough to appreciate because they have direct impact in maintaining market position and boosting profitability. However the third option is complicated in that it has the potential for more indirect influence which requires an knowledge of market dynamics as well as a higher level of risk for investment. These three aspects are further are discussed.
Maintenance and Replacement
Maintenance and replacement provisions must be a routine part of the annual budget of the casino, which is a fixed reserve that is based upon the projected replacement costs for furniture, fixture, equipment or building, as well as systems, construction and landscaping. It is not uncommon to get annual wish lists that are not correlated with the actual wear and tear of these items. Therefore, it is essential to schedule the replacement period, allocating the funds that don’t necessarily need to be spent during the year of accrual. When the business is in its initial phase, it may not be important to spend money to replace brand new equipment, but making sure that the funds are set aside to be recycled in the future, you will avoid having to scurry for funds at the time they are needed.
One particular area to be considered is the slot machine, whose replacement cycle has been shortening of late due to the fact that newer games and technologies are being developed at a higher rate, and as the competition dictates.
Investment in cost savings programs & systems are, by nature, and provided that they are properly studied, an investment that is less risky profit allocation funding then almost any other investment. These items can often take the form of new energy-saving systems as well as products that save labor, more efficient purchasing intermediation, as well as interest reductions.
There are some caveats to these products, one of which is to thoroughly analyze their touted benefits against your particular application, since often the claims of the product are exaggerated. Lease buy-outs and long term prepayments on debt can be advantageous, especially if the obligations were entered into during the development stage when equity funds might have been limited. In these instances, it is crucial to analyze this strategy’s net effect in the end, in relation to other possible applications of the funds to boost revenue or invest in growth.
One recent trend is the rising popularity of cashless slot systems that not only offer workers with a lower cost for fills, counts , and hand-pays, but also as a benefit to customers who don’t want to carry around cumbersome coin buckets. They also help in encouraging the use of multiple games.
Revenue Enhancing & Growth
Leveraging is the main catalyst of any revenue enhancing/growth related investment. It includes the following:
• Funds in the Reserve
O Marketing Clout
o Management Experience
The principle is to make the utilization of the existing assets to increase revenues and profit. Common examples include increasing average patronage base expenditure and broadening the efficient trading radius, by offering additional services or products, such as entertainment, retail stores, recreational/leisure amenities and overnight accommodation, as well as more eateries and, of course, expanded gaming.
Potential expansion and growth needs to be fully integrated into plan’s initial master plans to ensure a seamless integration of the possible elements of a phased-in programme and also allows for the minimum amount of interruption to operations. Unfortunately, it’s not always possible to anticipate market shifts and therefore expansion options must be considered with care.
The Big Picture
Before embarking on any type of enhancement or expansion program, we suggest taking a step back and looking at the property’s present positioning relative to the market. As we’ve observed in many gaming jurisdictions across the country, most casinos that were operating “fat and content” for a while and then find themselves experiencing a slowing of growth. Sometimes this is because of competition from either/both new local area casinos or regional casinos that can result in a decrease in patronage from peripheral area markets. In addition, the existing patrons may become bored of their experiences and may be looking for a new home. The history of the Las Vegas strip is testament to the benefits of continuously “reinventing” oneself.
Our approach to market studies is initially focused on determining that the facility currently in operation can penetrate the market and in relationship to market share of competitors. In general, this is an analysis of the existing patronage base based on information obtained from the player tracker database, as well as mailing lists, in conjunction with daily, weekly, day-part or monthly revenues.
The data is then interspersed by a review of market potential to determine whether markets are using the facility and the requirements it fulfills. What is even more important is that this kind analysis will reveal market segments that are not taking advantage of the facility more and what the reasons are.
As our own studies have found, casino markets are separated by various aspects of occasioned-use , and also regular patterns of spending and visitation. The traditional methods of market measurement, such as gravity models, typically take into account the demographics of a given population, based on revenues achieved in similar markets. However, an occasion segmentation market analysis gives more specific details regarding the causes driving a casino visit, how they relate to the advantages attained, and the extent that the event determines the amount spent and frequency of visits. This kind of data mining is more effective than gravity modeling as it will aid in determining the best facilities and positioning strategies necessary to attract each market segment, and measure their respective contribution to overall potential. The method has been used successfully in the restaurant business and other leisure-time service industries particularly in the context of a growing demand and supply market.
Perhaps even more crucially when looking at the market from an occasioned-use perspective, reveals the extent and nature of the underling competition. It does, in many instances, doesn’t just contain other casinos as well as other entertainment and leisure time activities, like clubs, restaurants, theaters, and other similar venues.
Another significant aspect of segmentation is in measuring overall market characteristics by day-parts. This is the revenues per the day, weekday, weekly, monthly as well as seasonally. This is particularly important when casinos want to reduce any greater than normal fluctuations which could occur between a slower Monday morning and a crowded Saturday night or suffer from extreme seasonal fluctuations.
When markets are segmented based on their demand patterns to gain a better understanding, it is possible to be gained of which amenities could help to boost the low demand times, and others that could just add to already maximized peaks.
A lot of expansion programs make the mistake of configuring extra amenities like luxury accommodation and dining establishments based on the peak demand periods. This means that the net effect of costs and expenses for these investment can negate any contribution they may make to increased gaming revenues. However, “fill-in” markets are the most efficient means to increase revenues overall since they draw on 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 analyze the gambling spending characteristics of a specific market but they cannot quantify the relative impact of any activities not based on gaming that might however generate casino-related traffic.
Relevant data about the frequency of use by people who go to restaurants entertainment, entertainment, and weekend getaways can often form the basis to prioritize facilities that target these markets which in turn they can boost the number of visits. While a lot of the patrons might not or do not visit casinos, their exposure to the possibility of using it could increase their usage in addition to creating another source of revenue.
Again, looking to looking at the Las Vegas paradigm, more and more strip hotels are now generating more, if not more than gaming revenue. This is because their hotels and restaurants are not as subsidized, and in addition to their expanding retail component contribute significantly for the profit line.
Once you’ve got a fundamental understanding of the dynamics of markets that are affecting the market, both in terms of the facility’s current market shares/penetration rates in relationship to the mix of competitors, as well as the overall use of market resources, a market matrix can be constructed that compares an equilibrium between the market’s demand and supply. This will help identify opportunities for unmet demand or areas of over-supply that is the basis for the creation of suitable facilities, upgrades and expansion criteria & strategies.
Essentially there are two types of strategies for expansion and upgrade such as profit-centers and those that are subsidized. Subsidized components could include adding or enhancing amenities that further widen the market for gaming and share, thusly having a direct influence on the growth of casino revenues Profit centers are designed to increase the current patronage patterns by providing additional spending opportunitiesand direct impact on gaming activity. Although many of more traditional facilities, like hotels, restaurants, retail establishments, entertainment facilities and leisure facilities could be included in one or both of these categories, it is important to identify the difference, so as to clearly establish the design/development criteria.
As was previously stated, Las Vegas continually seeks to improve itself in order to increase repeat visitors, which, in turn, creates a snowballing affect as each venue has to be able to keep pace with its neighbor. Somewhat, upgrading programs, which could include creating a new and fresher design, functions similar to an insurance policy for revenue loss, but do not necessarily relate to any incremental growth per se. It is not to be confused with replacing carpets that are worn and recycling of slot machines, the upgrade plan should try to bring new energy into the facility in terms of ambiance, quality of designs, finishes, and the overall appearance.
Expanding the capacity of existing ones is not a result of market analysis and more a aspect of “making the most of the time when the sun shines,” with a deep comprehension of the visitor pattern density. The back-up of players for table games and gaming positions could be good or bad, depending on when they occur and how often. In the case of high per position daily net wins aren’t always indicative of a prospering casino, because they can also indicate lost opportunity because of an insufficient number of games. Conversely, additional positions are not likely to produce the same results.
When setting up capacities for the new facility, it’s important to analyze the demand patterns and their day-parts that can maximize utilization during peak times while minimizing inefficiency , when the price for additional capacity are exceeded by its net income potential.
Food and Beverage Services
Within most casino venues, dining facilities are “loss leader,” designed to retain & attract casino patrons with cheap prices and excellent value, yet they also have the capacity to increase the occasioned-use of the casino, and also be profit centers.
In Nevada it is the only state in which complete historical F&B departmental operational results can be found for casino casinos with gaming revenues that range between $20 and $200 million reported food operations having the department lose 1.5 percent of revenue in 2001, in contrast to a near 14% loss in the year 1995.
Much of this major turnaround is due to the growth in the number of restaurants, particularly more upscale/specialty restaurants, which has increased sales to 20% gaming revenues in 1995 to almost 27 percent in 2001. In addition, food costs have dropped dramatically from the 45% of 1995 to 35% in the year 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. A market-relevant restaurant inside the casino could serve to attract the dining-out customers as well as benefitting the casino due to its proximity. So, when market conditions suggest changes in a casino’s restaurant arrangement, the main issues to be addressed are what can be done to satisfy the current clientele, improve occasioned-use and boost profit.
With turnkey hotel development costs that range from $75K to $350K for each room available the strategy of market positioning should be thoroughly researched. We see numerous projects undertaken with little understanding of the market dynamics and their economic implications.
Nationally, according to our most recent survey, there’s 724 casino around the nation. These casinos comprise 442 commercial enterprises, around 50% of them are in Nevada, and 282 Indian gaming facilities, of 209 of which offer the majority, in some cases all, Las Vegas type (Class III) games. Nearly 58% casinos operating in the commercial gaming industry have co-located hotels with 37 percent from the Class III Indian gaming venues, despite having an equal amount of games.
The preponderance of hotels in the commercial sector is due to certain gaming jurisdictions which require these hotels; for instance, Nevada (for an unlimited license) in addition to New Jersey. Furthermore, the majority of Nevada demand for market services comes from outside a daytrip’s radius, making overnight accommodations necessary to increase market share. When extrapolating these states from the total, the percentage of casinos with hotels falls by 50% and the average being 312 rooms & 1,183 games.
The obvious advantages of casino lodging units is that they can attract gambling markets that go beyond the normal day-trip range, as well as having some sort of “captured” segment of the market (Casinos together with Hotels). In addition, guest rooms can be another incentive to use player club points. Hotels can also increase the scope of a casino’s event-based use by offering entertainment and amenities that aren’t gambling and are complemented by the readily access to gaming, while being a profit-making center (Hotels that have Casinos). Furthermore, in a traditional environment of lodging, a hotel/casino has a competitive advantage by virtue of its added entertainment features.
Among the major Las Vegas properties there are more hotel rooms than games and the city has shifted from being a gambling destination to more of a resort & convention destination. In so doing these properties have improved their hotel return on investment and profitability by not having to charge cheap rates to draw gamers. While some regions, such as Laughlin and Reno, which do not have the same critical mass as Las Vegas, Las Vegas, still find it necessary to augment their hotel’s investments with casino revenue, due to the high cost of rooms and high seasonal fluctuations in visitation
In determining the best way to structure a casino development , it is essential to know the market’s financial dynamics as well as their effect on overall gaming revenue as well as profit. Within the free-standing (non-casino) hotel sector, the terms of financing are usually over a 15 to 20-year amortization plan, which includes the option of a 10-year balloon or refinance and have a break even level that is 70-65 percent occupancy. The typical casino-based lodging components enjoy high occupancy levels on the weekends, but low occupancy levels on weekdays. Therefore, it is not necessary to “build a church for Holy Week,” considering the efficiency of the property.
Moreover, if the intent is to gain additional customers to casinos from a greater market , it is vital to analyze the costs of any hotel subsidy in relation to the potential increase in gaming profits. A brand-new hotel of 200 rooms at a casino already generating around 20,000 weekend visitors could not be attracting 2% to 4% more gamblers, but also exposing its own costs to increase. Concerning occasioned-use, especially for weekenders and tourists casino hotels could be competing with alternative resorts in the region.
Ideally, these facilities, if not located in markets with insufficient local/day-trip markets (e.g. Laughlin) are designed on the basis of their non-gaming and off-peak support in order to ensure that they maintain appropriate room rates and a sufficient level of profit. The hotel should also provide the facilities that these markets want and, where appropriate: conference and convention facilities as well as indoor and outdoor recreational components.
While it is a niche segment, RV Park facilities are an investment with less risk in accommodation facilities for overnight stays that still provide the same advantages. According to the most current data there are more than 9 million families in United States that own RVs and comprise one of the ten households that own a vehicle. A large portion of these households are the 55 and over age group, which have more than the average propensity to gamble and an annual income.
RV Park development costs are significantly lower than hotels, but usually have a high seasonal use, peaking during summer in temperate resort environs and in the winter months within the “snowbird” areas.
Retail/outlet shopping is now gaining important presence at casinos all over the nation. 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 sales of all malls that sell retail across the U.S., and the rise in retail sales in the city is higher than the revenue from gaming. The presence of these stores serves as both an activity for the area’s 35 million annual visitors, who spend less than 4 hours per day actually playing also a major profit center that monetizes the visit base.
In less resort type market, outlet malls are significant traffic generators from which a casino facility can draw patrons. On an individual basis casino, they can broaden their occasional-use offering by providing unique and local-style shopping that is specially designed to appeal to the “adjunctive” consumer market. The extent and characteristics of these stores need to be adapted to the prospective market, the current trends in visitor numbers as well as the local ambiance.
Although entertainment is a mainstay in casinos, it has its roots in the Rat Pack days in Las Vegas to the modern-day imposing concert/arena venues and specialty shows Their market dynamics are much unappreciated. They are at once, diversions, attractions, profit centers and public relations instruments. They could create significant losses therefore, they must be thoroughly examined to determine the most appropriate design.
The majority of major entertainment events taking place during weekend periods the attracted audiences may not have a major impact on a likely already busy schedule. So it is essential that the particular event be organized to at least break even or turn a small profit. While this may seem self evident, the more central issue is the venue’s ability to also make the most of its initial and investment. Outdoor facilities can sharply lower the costs of construction, but also are susceptible to weather changes and seasonal usage. Furthermore, tents for parties and temporary structures usually don’t have the resemblance of a permanent venue which is an integral component of the casino’s facilities.
There is a lot of interest at present being paid to the creation of recreational facilities at casinos, specifically those connected to resort projects. Golf courses are a common element of resorts and several Indian communities enjoy the benefits of being able to access the vast land area as well as water rights that these types of enterprises require.
Like all other ways to increase revenue through reinvestment that are discussed in this article, recreational facility development should be considered in the context of its potential to increase the number of customers for casinos and/or be an opportunity to earn money. Golfers have traditionally a high gaming proclivity the association of golf with a casino is not exactly at a level, given the length of time required to complete a typical round. Furthermore, even with the most intense utilization rates an average 18-hole golf course will only accommodate about 140 players each day, while the average national figure for year round environments is about 100 rounds per day. It’s not a lot of extra players at gambling, even when every one of them gambled, especially in light of the costs of a standard course that is, without land, and ranging from $5M and $15M.
However, golf course development in conjunction with a resort’s package and/or to satisfy a local market demand could bring numerous benefits that are not related to gaming. 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 they incorporate fairway sites that are more valuable as compared to non-golf course sites. Given the trust status of Indian land, this could be a bit problematic on reservation lands, unless some sort of lease for long-term land can be reached with the home owners.
Planning/Financing & Implementation
Once all of the relevant market factors have been considered and weighed against their costs vs. benefits, a comprehensive expansion and reinvestment plan can begin to take shape. A design & construction team should be assembled that will help to further understand the program in terms of innovative and valuable engineering input and also maintain its established market positioning and financial strategy.
Importantly, the plan should show how each component will be integrated in the overall fabric and the method by which it will be funded. Some funding can stem from reserve profit allocations and others are funded independently by additional debt which has its amortization considered in the overall feasibility study.