How to Care for and Feed the Golden Goose
Casinos face unique challenges in maintaining profitability and remaining competitive under the new paradigm of falling economic conditions. These factors are made more difficult in the commercial gaming sector due to rising tax rates and in the Indian gaming sector due to self-imposed tribal general fund contributions and per capita distributions. There is also a growing trend toward state-imposed fees.
It is difficult to determine how much to “render to Caesar” while keeping the funds available to grow market penetration, maintain market share and improve profitability. However, this must be done well.
This article discusses how to plan and prioritize casino reinvestment strategies.
The Cooked Goose
It would seem obvious not to cook the goose who lays golden eggs. However, it is surprising how little attention is given to its ongoing proper care and feeding. Developers/tribal councils, financiers, and investors are all eager to reap the benefits of a casino. Unfortunately, there is also a tendency to not allocate sufficient profits to asset maintenance & enhancement. This raises how much profit should be reinvested and for what purposes.
There are no set rules because each project is unique. For example, most big commercial casino operators don’t distribute net profits to stockholders as dividends. Instead, they reinvest the funds to improve their existing venues and seek new ones. These programs may also be funded by additional debt instruments or equity stock offerings. These financing options will be more prominent due to the lower tax rates for corporate dividends. However, the core business must maintain its prudence and continue to reinvest.
Allocation of Profit
The net profit ratio, earnings before income taxes & deductions, for publicly-held companies was 25%. This average figure includes gross revenue taxes, interest payments, and group income. In addition, the average profit is used for asset replacement and reinvestment.
Low-tax jurisdictions that allow casinos to reinvest in properties are more likely to have them. This will increase revenues and eventually help the tax base. New Jersey is an example since it requires certain reinvestment allocations as a revenue stimulant. Illinois and Indiana, which have higher effective rates, are at risk of reducing their reinvestment, which could eventually reduce the casino’s ability to increase market penetrations. This is especially true as the competition in neighboring states increases. A combination of efficient operations and equity offering can result in higher available profits for reinvestment.
How a casino company allocates its profits is crucial to its long-term viability. This should be a key part of its initial development strategy. Although short-term loan amortization and debt prepayment programs might seem attractive to get out of an obligation quickly, they can severely limit the ability to reinvest/expand in a timely manner. This applies to any profit distribution to investors or, in the case of Indian gaming projects, to tribes’ general fund for infrastructure/per-capita payments.
Many lenders also make the error of requiring large amounts of debt service reserves. As a result, they place restrictions on reinvestment and further leverage, severely limiting a project’s ability to maintain its competitiveness and take advantage of available opportunities.
While we don’t advocate that profits be reinvested in operation, it is important to consider an allocation program that accounts for the “real” costs associated with maintaining the asset and maximizing its impact.
Three areas are essential for capital allocation, and they should be considered.
- Maintenance and replacement
- Cost Savings
- Revenue Enhancement/Growth
These first two priorities are simple to understand. They have a direct effect on market positioning and profitability. The third, however, is more complex. It has a greater indirect effect that requires a deeper understanding of market dynamics and higher investment risk. These are only just a few of the many aspects we will be discussing.
Maintenance and Replacement
Maintenance and Replacement provisions should be part of the casino’s annual budget. This fixed reserve is based on projected replacement costs for furniture, fixtures, equipment, buildings, systems, and landscaping. We often see that annual wish lists are not proportional to actual wear and tear. Therefore, it is important to plan the replacement cycle and allocate funds that don’t necessarily need to be spent during the year of accrual. For example, it may not be necessary to replace brand-new assets during a start-up, but accumulating amounts for eventual recycling will save you from scrambling for funds when needed most.
Slot machines are a special area that deserves attention. The replacement cycle for these machines has been shorter recently as newer technologies and games are being developed faster than the competition.
Cost savings programs and systems are, by their very nature, and if properly researched, a safer way to allocate profit allocation funding than almost any other investment. These items may include new energy-saving systems, labor-saving products and more efficient purchasing intermediation.
There are some caveats to these items. One is to compare their claimed savings with your application carefully. Many times, the product claims can be exaggerated. Long-term debt prepayments and lease buy-outs can be beneficial, especially if the obligations were made during development when equity funds might have been limited. It is important to evaluate the net impact of this strategy on the bottom line in these situations and compare it with other revenue-enhancing/growth investments.
Recent trends include the increasing popularity of cashless slot systems. These save labor for fills and counts and help patrons who don’t like to carry around heavy coin buckets. They also encourage multiple game use.
Revenue Enhancing & Growth
Leveraging is the main catalyst for any revenue-enhancing/growth-related investment. It includes the following:
o Patronage Base
o Funds Available
It is important to make the most of every asset available to increase revenues and profitability. Examples include increasing patronage base spending, widening effective trading radius, and offering additional products/services such as entertainment options, retail stores, recreational/leisure amenities and overnight accommodations.
To ensure cohesive integration of all elements of a phased-in plan, you must include potential expansion and growth into your initial master planning. This will allow for minimal operational disruption. However, it’s impossible to predict market changes. Therefore, expansion options must be carefully considered.
The Big Picture
We recommend that you first assess the current position of the property relative to its market and the competitive environment before embarking on any expansion or enhancement program. We have seen this in many gaming jurisdictions across the country. Many casino ventures that have been “fat and happy” for several years find themselves in a period of zero growth. This can sometimes be due to increased competition from new casinos in the area or regional venues, which decreases patronage from those markets. Customers may also become dissatisfied with their current experience and seek new opportunities. Las Vegas history is a testament to the importance of constantly “reinventing yourself”.
These market studies focus on how current facilities are reaching the potential market and how it compares to other market shares. This is typically an analysis of current patronage based on information gleaned via player tracking data and mailing lists. It also includes day-part, daily, and monthly revenue trends.
The data is then analyzed to determine the market potential and show how certain segments use the facility. This analysis will also reveal which market segments are not using the facility as fully and why.
Our proprietary research has shown that casino markets can be segmented by different characteristics of occasioned use, including typical spending and visitation patterns. Gravity models and traditional market measurement methods usually focus on the demographic characteristics of a population rather than how similar markets have performed. A market segmentation analysis of occasions provides more information about the factors that lead to a casino visit, their relationship to the benefits sought, and the extent to which the occasion affects average spending and visitation frequency. This data mining is more useful than gravity modeling. It helps determine the types of facilities and positioning strategies needed to attract each market segment by assessing their contribution to the overall potential. This process is used in restaurants and other leisure-time service industries, particularly when there is a wider supply/demand market.
Even more important, an occasioned-use view of the market reveals the extent to which the competition is present. This includes other casinos and alternative entertainment and leisure activities such as clubs, restaurants, and theaters.
Another important aspect of occasion segmentation involves measuring overall market characteristics by day parts: revenue density per day, day per Semaine, weekday, monthly and seasonal. This data is particularly important for casino venues that want to reduce any fluctuations higher than usual that might be occurring between a slow Monday morning or a packed Saturday night or those that experience severe seasonal variations.
Segmenting markets by demand patterns allows for a better understanding of which amenities can help boost weak periods and those that might only increase the peak demand.
Many expansion programs make the error of adding amenities like high-end dining and lodging to the program based on peak demand periods. The net effect of these expenses and costs can negate any potential contribution to gaming revenues. Fill-in markets, which use existing capacity, are more efficient ways to increase overall revenue. Las Vegas has achieved great success in creating strong mid-week activity by promoting its extensive conference/convention facilities.
Another benefit of utilizing occasion-segmentation is its ability to indicate the potential impact certain amenities have on “impelling” visitation. Gravity models are used to analyze the casino spending patterns in a market. However, they cannot measure the relative impact on non-gaming activities that may still generate casino traffic.
Data on the number of people who frequent restaurants, entertainment, or weekend getaways can be a key basis for focusing on amenities that cater to these markets. This will increase the visitation. While many of these customers may not use the casino, they may increase their usage and create an additional profit center.
Looking back at Las Vegas, we see that more strip properties are generating more non-gaming revenue than gaming revenue. This is because their hotels and restaurants are becoming less subsidized and, along with their growing retail offerings, are strong contributors to the bottom line.
Once you have a basic understanding of the market dynamics (both in terms of the existing facility’s market shares/penetration rates relative to the competitive mix and overall occasioned-use), you can create a matrix that compares the supply and demand. This function identifies areas of unmet demand and/or excess supply. It is the basis for creating appropriate amenities, expansion and upgrade criteria and strategies.
There are two main types of expansion/upgrade strategies. They are subsidized and profit-centers. Subsidized elements can include adding and improving amenities to increase current gaming market penetration/shares. This has a direct effect on growing casino revenues. On the other hand, profit centers are designed to leverage existing patronage patterns and provide additional spending opportunities. They also have an indirect effect on gaming activity. Many of the traditional amenities, such as restaurants and hotels, retail shops or entertainment venues, and recreational facilities, can be included in either one of these two categories. However, it is important to distinguish between them to establish the design/development criteria.
Las Vegas is constantly trying to reinvent itself to increase repeat visitors. This creates a snowball effect as each venue has to keep up with its neighbor. Upgrading programs that include creating a fresher and more appealing appearance are, in part, an insurance policy against falling revenues. They do not necessarily lead to incremental growth. An upgrade program should not be confused with replacement programs for worn carpeting or slot machine recycling. Instead, it should create excitement about the facility’s ambiance, quality finishes, layouts, and overall decor.
Expanding existing capacity is not based on market analysis but rather on “making hay while it shines”, based upon a detailed understanding of visitor patterns. Depending on the time and frequency of patron back-ups, they can be good or bad for restaurant tables and gaming positions. A casino with a high per-position per-day net win average is not always successful. They could be a sign of insufficient games or lost opportunities. However, more positions may not always result in the same averages.
It is crucial to evaluate the demand patterns for new facilities before configuring capacity. This will ensure maximum penetration during peak periods and minimize inefficiency.
Food & Beverage Amenities
Most casino venues have restaurant amenities that are “loss leaders” and designed to attract low-priced patrons. However, they also offer great value, which can be used to increase the number of people who visit the casino.
Nevada is the only state with detailed historical F&B operating results for casinos. Properties with gaming revenues between $20M and $200M had a net loss of 1.5% in 2001. This compares to almost 14% in 1995.
This major turnaround can be attributed to increased food outlets, particularly upscale/specialty ones, which has boosted sales from 20% in 1995 to nearly 27% in 2001. Food costs have dropped sharply from 45% to 35% from 1995 to ’01.
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 casino with a restaurant in the market can attract customers to the area. The casino also benefits from the proximity of the restaurant. When market conditions change, it is important to address the following questions: How can the casino’s restaurant layout be improved to meet current patrons, increase occasioned use and improve profitability?
Turnkey hotel development costs can range from $75K to $350K for each available room. A market positioning strategy should be thoroughly researched. We see too many of these projects without a thorough understanding of market dynamics or economic impact.
According to our most recent survey, there are 724 casinos in the nation. These include 442 commercial operations, half of which are located within Nevada, and 282 Indian gaming venues. Two hundred nine of these offer most (if not all) of Las Vegas-type (Class III). Nearly 58% of casinos operating in the commercial gaming industry have co-located hotels. This compares to 37% of Class II Indian gaming venues, which contain a similar number of games.
Some gaming jurisdictions require them, including Nevada (for an unlimited license) and New Jersey. This explains why there are many hotels in the commercial sector. Nevada has a lot of demand from people who travel beyond a daily radius to capture market share. Extrapolating these states to the total shows that 50% of commercial casinos have hotels. There are an average of 312 rooms and 1,183 games.
Casino lodging units have the obvious advantage of attracting gaming markets beyond the normal day trip radius. Guest rooms are another way to earn player club points. In addition, the hotel’s opportunity-use is increased by offering leisure activities and amenities that are not gambling. This profit center is called “Hotels with Casinos”. A casino/hotel can also be a valuable addition to a traditional lodging environment due to its entertainment features.
As Las Vegas transitions from being a gaming destination, more hotel rooms are now than games. These properties were able to increase their investment returns and hotel profitability by not offering low rates to draw gamers. Despite not having the same critical mass as Las Vegas, certain areas like Laughlin or Reno still need to supplement their hotel investments with casino revenue. This is due to low room rates, large seasonal visits, and other factors.
It is important to fully understand the financial and market dynamics to design a casino hotel development. For example, the financing terms for free-standing hotels (non-casino-based) are typically over a 15- to 20-year amortization schedule with a ten-year balloon/refinance and have a break-even point of 65% to 70%. In addition, the typical casino-based lodging elements have high weekend occupancy but lower weekday levels. Therefore, it is not advisable to “build an Easter Sunday church,” while considering the overall efficiency of the asset.
It is also important to weigh the costs of any hotel subsidies against the potential increase in gambling profits if the goal is to attract more casino patronage from outside the market. The addition of 200 rooms to a casino that already attracts 20,000 visitors per weekend may not add 2% to 4 percent more people, but it could increase its costs. Casino hotels could also be competing against other resorts in the area when it comes to occasioned use, particularly among weekenders and tourists.
These types of facilities should be located in markets with insufficient local/day-trip markets (e.g., These facilities, such as Laughlin, should be designed because they are not gaming-related and provide off-peak support to ensure appropriate room rates and profitability. These amenities should include, where appropriate, conference and convention facilities and indoor/outdoor recreation elements.
RV Parks are an attractive option for overnight lodging. Although they may be more niche, RV Parks offer a lower investment but can still provide some of the same benefits. The latest data shows that more than 9,000,000 households own RVs in the United States. This is one of ten households with RVs. These households often include those over 55 who have higher gaming habits and a higher annual income.
The development cost of RV parks is much lower than that of hotels. However, RV Parks have high seasonal usage, peaking in the summer months in resort areas and the winter months in “snowbird” regions.
Outlet and retail shops
The rise of retail/outlet shopping at casinos across the country is significant. First represented by online casino logo shops and a few high-roller/jackpot-winner positioned boutiques, these stores have grown into major malls and entertainment centers. For example, the Forum Shops at Caesar’s Palace Las Vegas has the highest sales per square foot of any retail mall in the U.S. and is experiencing a significant increase in retail sales that exceeds gaming revenue. These shops provide entertainment for the region’s 35 million visitors annually, who now spend less than 4 hours a day gaming. They also serve as major profit centers that capitalize on the visitor base.
Outlet malls can be a strong source of patronage in less popular markets. Casinos can increase their occasioned use by offering unique, local shopping specifically positioned to attract “adjunctive daytrippers”. These stores must be tailored to meet the needs of local markets, current visitor trends, and any local atmosphere.
Entertainment is an important part of casino environments. It dates back to the Rat Pack days in Las Vegas and continues today with the impressive concert/arena venues and specialty shows. However, their market dynamics are often misunderstood. They can be used as profit centers, diversions, public relations tools, profit centers, or attractions. However, they can also cause major losses, so it is important to consider their configuration carefully.
Most major entertainment events are held during weekends, so the potential impact on busy times may be minimal. However, the event must be organized to at least break even or make a small profit. This is obvious, but the most important issue is how the entertainment venue can also amortize its initial investment in development costs. Although outdoor facilities are more cost-effective than indoor venues, they can also be subject to seasonal changes and weather fluctuations. In addition, party tents and temporary structures don’t have the same cache as a casino facility that is an integral part.
These days, a lot of attention is being paid to the development and operation of recreational facilities at casinos venues, particularly those associated with resort projects. In addition, many resorts have golf courses as an adjunct. Many Indian communities benefit from having access to the large land areas and water rights that these kinds of undertakings need.
Like all other revenue-enhancing reinvestment options discussed herein, recreational facility development should only be considered in the context of the potential to attract additional casino patrons or serve as a profit center. Golfers have a strong gaming proclivity, but the association between golf and a casino is not always in sync due to the time it takes to play a round. Even with the highest utilization rates, an 18-hole golf course can only hold 140 players per day. The national average for year-round environments is 100 rounds per day. Even if they all gambled, this isn’t a lot of extra players for the casino. This is especially true when considering the average course cost, which ranges from $5M to $15M.
Golf course development can be part of a resort package or meet local demand. From a resort development standpoint, a golf course and other recreational elements can add to the facility’s competitive positioning where its development/operating costs can be recaptured through higher room rates/green fees. Traditional golf courses often “pencil out” fairway home sites when they incorporate them. These sites have a higher value than other non-golf course properties. This may prove problematic for Indian lands due to the trust status. However, long-term land leases can be negotiated for homeowners.
Planning/Financing & Implementation
After all the market factors have been weighed against their costs vs. advantages, it is possible to begin to build a comprehensive expansion and reinvestment program. But, first, it is necessary to form a design and construction team that can interpret the program in terms of creative and value engineering inputs and maintain its market positioning and financial strategies.
The program must clearly show how each element will be integrated into the overall facility fabric and how it will be funded. For example, reserved profit funding may be used to fund some elements, while other funds can be sourced from additional debt that has been amortized in the overall feasibility analysis.
Beyond the siren call of gaming, the irresistible draw of casinos often lies within the exquisite culinary landscapes they curate. High-end eateries boasting delicacies from around the globe beckon patrons to their tables, promising a feast for the senses. From casual comfort foods to gastronomic feats crafted by world-renowned chefs, these establishments serve more than meals – they dish out experiences.
While pleasing the palate, this gastronomic evolution within casinos serves a more strategic purpose, acting as a magnetic draw for non-gamblers. After all, who can resist the allure of culinary exploration? The financial upshot of this venture is clear as day – a significant uptick in profit for many casinos from their food and beverage sectors. It’s not a mere appendage to the casino’s offerings but a lucrative venture in its own right. Yet, one cannot deny that threading this needle requires meticulous planning and a deep understanding of local food trends and tastes.
Delving deeper into the casino experience, one encounters the luxurious accommodations casino hotels offer. These bastions of comfort and convenience lure guests into extending their stays, potentially escalating their gaming activities. Stepping into the realm of the extraordinary, well-managed casino hotels emerge as tourist destinations themselves, radiating an allure of convenience and luxury.
These hotels don’t just provide a bed to sleep on – they go the extra mile, offering amenities like spa services, fitness centers, and even business facilities. Leisure and business travelers, in turn, find their diverse needs met under one roof. There’s also a positive ripple effect on local tourism, thus significantly pumping up local economies. The crux of a successful casino hotel is its ability to seamlessly integrate an immersive experience, synergizing the gaming aspect with a holistic hospitality package.
In the modern casino panorama, a paramount concern is the health and safety of patrons. To retain their trust and patronage, casinos adopt robust health and safety protocols, ranging from regular sanitization to crowd management and even provisions for emergency medical services.
Tying this in with their corporate social responsibility initiatives, casinos also spotlight responsible gambling. They dedicate resources to educate their patrons about the risks tied to gambling and promote healthier practices. These efforts foster customer loyalty and reinforce the casino’s commitment to ethical conduct.
Charting the course for a successful and sustainable casino necessitates a comprehensive expansion and reinvestment program. Every facet must be considered, from culinary experiences to accommodations, health, and safety. The result? An all-encompassing strategy that spells success in terms of customer satisfaction and profitability. It’s a delicate balance, but when achieved, it makes for a casino that’s as attractive as it is sustainable in the long run.