casino

How To Invest In Casino

The Proper Care & Feeding of the Golden Goose

In the current trend of economic decline across a wide range of consumption, the casinos are facing particular challenges in determining how they can maintain their profitability while remaining competitive. These factors are further complicated within the commercial gaming sector due to rising tax rates as well as within the Indian gaming sector , by self imposed contributions to tribal general funds, or per capita distributions, in addition to an increasing trend of the levy of fees by the state.

Determining how much to “render unto Caesar,” and ensuring that you have the necessary funds to ensure market share, increase market penetration and improve profitability, is a daunting task that needs to be carefully planned and executed casino.

In this light and in the writer’s view that includes time and grade hands-on experiences in the planning and management of these types of investments, the article provides methods for planning and prioritize an investment strategy for casino reinvestment.

Cooked Goose

It is common sense for a goose to not be cooked that lays the golden eggs, it’s surprising how little thought is often given to its continual feeding and care. When a new casino, developers/tribal councils, investors and financiers are eagerly awaiting the rewards . Unfortunately, there is a tendency not to put a significant portion of the money to asset maintenance & enhancement. In the process, they are begging how much of profits should go to the reinvestment process, and to what objectives.

Inasmuch as each project has its own particular set of specifics, there aren’t strict and unchanging rules. In the majority of cases, many of the big commercial casinos don’t distribute net profits in dividends to their shareholders, but instead invest the profits in improving their existing facilities while in search of new locations. Certain such programs supported by additional loans and equity offerings. Tax rates that are lower on dividends from corporations will shift the focus on these methods of financing however, they must still maintain the core business prudence of continuing investment reinvestment.
Profit Allocation

As a whole and prior to current economic situation, publicly-owned companies had net profit ratio (earnings prior to income tax and depreciation) which averaged 25% of the income after the deduction of tax on revenue and interest. On average, almost two thirds of the remaining profits are utilized for investment and replacement of assets.

Casinos in lower gross gaming tax rate jurisdictions are more likely to invest in their properties, thus boosting revenues that can ultimately improve those who pay taxes. New Jersey is a good instance, as it requires certain reinvestment allocations, as an income stimulant. Other states, including Illinois and Indiana with higher effective rates, are at the risk of delaying the amount of reinvestment, which could eventually diminish the capacity of casinos to expand market penetrations in particular as neighboring states get more competitive. Moreover, effective management can yield higher profit potential for reinvestment. This is due to both efficient operations and favorable equity and borrowing offerings.

The way a casino company decides to allocate its casino profits is a key element in determining the viability of its business over time, and should form an integral aspect of the initial development strategy. While short term loan amortization/debt prepayment plans may initially seem desirable so as to quickly come out from being obligated however, they also drastically restrict the ability to invest or expand on a timely basis. The same is true for any distribution of profits that is made to investors, or, in the case of Indian gaming , distributions to a general fund of the tribe for infrastructure or per capita payments.

Moreover, many lenders make the error of requiring too much debt service reserves and place restrictions on reinvestment as well as further leverage , which could severely hinder a particular project’s ability to keep its competitiveness intact and/or make the most of available opportunities.

While we do not advocate that all profits be reinvested into the business however, we encourage the idea of an allocation plan that considers what are the “real” costs of maintaining the asset and maximizing its impact.

Establishing Priorities

There are three major elements of allocation of capital that should be considered, as illustrated below, in order of priority.

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

The first two priorities can be easily understood, in that they have an immediate impact in maintaining market position and increasing profitability. On the other hand the third option is complicated in that it has much more of an indirect impact that requires an understanding of the market dynamics and higher risk for investment. The entire subject matter is more thoroughly discussed.

Maintenance & Replacement

Maintenance and replacement plans should be a regular function of the annual budget of the casino, which is a fixed reserve based upon the anticipated replacement costs of furniture, fixture equipment, building systems, and landscaping. However, we often get annual wish lists which do not correspond to the actual wear and wear of these items. Therefore, it is crucial to plan the replacement period, allocating money that does not have to actually be incurred in the year of accumulation. In the initial phase, it may not be important to spend money for replacement of brand-new items, but accruing amounts to be reserved to be recycled in the future, you will avoid having to scurry for funds at times when they are most needed.

A particular area that deserves attention is slot machines, whose replacement cycle has been decreasing in recent years, as newer games & technologies are growing more rapidly as competition dictates.

Cost Savings

The cost savings plans Systems and cost savings programs are, in their nature, and if adequately researched more secure use of profit allocation than nearly any other investment. These investments can take shape of energy saving systems, labor saving products as well as more efficient buying intermediation, and interest reductions.

There are some caveats to these products One of them is to analyze the claimed savings against your specific application, since often the claims made by the company are exaggerated. Lease buy-outs as well as long-term prepayments on debt can be beneficial, particularly when the agreements were made at the time of development when equity funds might have been restricted. In these cases it is important to examine the impact of this strategy in the end in relation to other possible ways to use the money for growth and revenue enhancement.

One trend that has recently emerged is the growing acceptance of cash-less slots that offer labor savings for fills, counts and hand-pays, but also serve as an aid for patrons who do not like carrying around cumbersome coins, and also encouraging multiple game usage.
Revenue Enhancing & Growth

Leveraging is the key driving force behind any revenue-enhancing or growth related investment. It includes:

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

The idea is to maximize the utilization of the existing asset in order to achieve higher revenue and profitability. Some examples are increasing average patronage base spending and expanding the trade distance by offering other products or services, like retail stores, entertainment alternatives such as leisure and recreational facilities and overnight accommodation, as well as more restaurant choices and, of course, increased gaming.

Master Planning

Future expansion and growth needs to be included in the initial master plan so that it will ensure the seamless implementation of the various elements in a phased-in program in order to ensure the least disruption to operation. Unfortunately, it’s not always possible to anticipate changes to the market, so expansion alternatives must be considered with care.

The Big Picture

Before embarking on any type of expansion or enhancement plan we strongly recommend first stepping back and reviewing the current position of the property in relation to the marketplace and competitive environment. As we’ve seen in a variety of gaming jurisdictions across the nation, most casino operations that have been “fat and happy” for several years, discover themselves in a stagnant period. Sometimes , this is due to the competition that comes from either/both local area casinos or regional venues which can have the effect of decreasing patronage from the peripheral local markets. Also, the current client base could become dissatisfied with their current experience and may seek greener pastures. The long-standing growth of the Las Vegas strip is testament to the benefits of constantly “reinventing” oneself.

Our approach to these market studies is primarily based on determining which the current facility can penetrate the potential market, and also in relation to any market share held by competitors. Typically, this represents an examination of the current patronage pool based on information gleaned from the players tracking data base, and mailing lists, as well as day-part, daily, weekly and monthly growth trends.

The information is then correlated by a review of overall market’s potential to reveal the extent to which certain market segments are using the facility, and what needs it can meet. But what is more important is that this type of analysis will indicate those segments of the market that are not utilizing the facility more fully and what the reason is.

Occasion Segmentation

According to our research shown, the market for casinos is separated by different aspects of use on occasion, in addition to the typical patterns of spending and visits. The standard methods of market analysis, which includes gravity models, usually only weigh the demographic characteristics of a specific population with respect to the revenues that are generated in similar markets. However, an occasion-specific market analysis gives more specific details about the factors for a casino’s visit, how they relate to the benefit targeted, and the degree that the event determines the frequency of visitation and average spending. This kind or data mining process is far more effective than gravity modeling as it will assist in determining the best services and positioning strategies that are required to draw in each market segmentby assessing their contribution to the aggregate potential. The method is used with success in the restaurant industry and other industries that provide leisure time services particularly in the context of a growing demand and supply market.

Perhaps more important considering the market from an occasioned-use perspective, reveals the extent and the nature of the competition, that, in many instances, doesn’t just includes other casinos, however, also other entertainment and leisure time activities, including clubs, restaurants theaters, etc. like.

Demand Density

Another aspect of occasion segmentation is the measurement of overall market characteristics by day-parts and revenue density based on time of the day, weekday and monthly, weekly, and seasonally. This is crucial data in the case of casinos that are looking to reduce any greater than normal fluctuations that may be observed between a slow Monday morning and a busy Saturday night, or are experiencing extreme seasonal variations.

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

A lot of expansion programs fail to account for extra amenities like luxury hotels and restaurants in accordance with peak demand times. As a result, the total effect of costs & expenses for these investments can negate any contribution to the increase in gaming revenues. Instead, “fill-in” markets are the most efficient means to increase overall revenues, since they use 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 spending patterns associated with casinos of a particular market but they cannot quantify the effect of other activities not based on gaming that might however generate casino-related traffic.

Relevant data on the frequency of use by people who go to restaurants entertainment, entertainment and weekends getaways are often the basis upon how to design amenities to serve these markets and in doing so it can increase the amount of people visiting. Although many of these people might or might not use casinos, their exposure to the chance could boost their utilization as well as creating an additional source of income.

Looking at the Las Vegas paradigm, more and more casinos are generating as much, if not more, non-gaming revenues than gaming revenue; and their restaurants and hotels are less & less subsidized, and with their expanding retail component are a major contributor to the bottom line.

Program Development

Once you’ve got a fundamental understanding of the dynamics of the market as well as the facility’s market shares and penetration rates in relation to the competitive mix, as well as the general use of market resources, a matrix can be created to set an equilibrium between the market’s demand and supply. This function seeks to identify areas with unmet demand and/or over supply, that forms the spring-board to the creation of relevant amenities, expansion and upgrade guidelines and strategies.

Impact Criteria

The basic idea is that there are two kinds of upgrade strategies which are profit-centers and subsidized. Subsidized components could include adding or upgrading amenities that expand current gaming market penetration/shares and thus having a direct influence on the growth of casino revenues as well as profit-centers are designed to increase existing patronage patterns, providing more spending possibilities, as well as having an indirect effect on the gaming activities. Although many of the more conventional amenities, such as hotels, restaurants, retail stores, entertainment venues and leisure facilities could be classified into either of these categories, it is important to identify the difference so that you can clearly define the design and development criteria.

Upgrading/Expansion

As was previously stated, Las Vegas continually seeks to reinvent its own model to increase repeat visitation, which in turn creates a snowballing affect as each venue must keep-up with its counterparts. Upgrading programs, which may involve the creation of a fresh and new design, functions like an insurance policy to protect declining revenues. They do not necessarily correspond to increases in revenues per se. While not meant to be interpreted as the replacement of worn carpeting or slot machine recycling an upgrade program should seek to create new excitement about the building in terms of design, ambiance, the finishes, layouts, and overall design.

The expansion of capacity already in place is less about market analysis but rather a function to “making hay while the sun shines,” that is based on an accurate understanding of patterns of visitors. Patron back-ups for restaurants and gaming tables can be both good and bad, based on when they occur and the frequency at which they occur. In the case of high per position, net wins are not necessarily indicative of a successful casino as they could also mean lost opportunity because of an absence of games. Conversely, additional positions are not likely to produce the same results.

When determining the capacity of an upcoming facility, it is important to evaluate the demand patterns into their respective day-parts that can maximize access during peak times while minimizing inefficiency – the point at which the cost for additional capacity are exceeded by its net income potential.

Food & Beverage Amenities

The majority of casino venues’ the restaurant facilities are “loss leaders,” designed to keep in place and draw patrons to casinos by offering low prices and great value; yet they are able to increase the number of occasions that people can use the casino, while also offering potential profit centres.

In Nevada, which is the only state where detailed historical F&B departmental operational results is available to casinos, casinos with gaming revenues that range between $20M and $200M revealed food operations having a net departmental loss of 1.5 percent of sales in 2001 which was nearly a 14% decrease in 1995.

The major reason for this change is due to the increasing number of restaurants, particularly more specialty/upscale restaurants. This has driven sales up from 20% of gaming revenues in 1995, to almost 27 percent in 2001. In addition, food costs have decreased dramatically from 45% in 1995 to 35% by the time of 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 assist in attracting the dining out destination market while the casino benefits by its proximity. When market conditions call for the need to alter a casino’s restaurant layout, the issues to be considered are how to design them in order to please the current customer base, increase the number of occasions and increase profit.

Lodging Elements

With turnkey hotel development costs that range from $75K to $350K per available room, a market positioning strategy should be thoroughly researched. However, we have seen many projects being developed without understanding of the dynamics of the market and their economic impact.

According to our most recent survey there are 724 casinos across the nation. These casinos comprise 442 commercial operations, about half of which are located in Nevada and 282 Indian gaming venues, out of which 209 offer most, or all, of Las Vegas kind (Class III) games. Roundly 58% of casinos operating in the commercial gaming industry have hotels co-located with them, in comparison with 37% in Class III Indian gaming venues, despite their containing the same average amount of games.

The dominance of hotels within the commercial sector owes to some jurisdictions that have gaming requirements that require them; including Nevada (for an unlimited license) as well as New Jersey. Furthermore, the majority of Nevada market demand comes from outside a daytrip’s radius so overnight accommodations are required in order to gain market share. When comparing these states to the whole, the proportion of all casinos operating commercially with hotels falls down to 50 percent, and the average being 312 rooms and 1,183 games.

One of the main advantages of hotel and casino units is that they can attract gambling markets outside of the normal day-trip area, and also have a somewhat “captured” market (Casinos with Hotels). In addition, guest rooms can be another incentive to use player club points. Hotels can also increase a casino’s occasioned-use by offering other leisure and entertainment options that aren’t gaming, augmented by the ready accessibility of gaming, and also representing another profit center (Hotels that have Casinos). Additionally, within a traditional lodging setting, a casino/hotel can be competitive due to the virtue of its added entertainment features.

Within the top Las Vegas properties there are more hotel rooms than gaming in the city, which is because it has changed from being a gaming hub into a destination for conventions and resorts. As a result, these properties have improved their hotel return on investment and profitability by not needing to offer cheap rates to draw gamers. While some regions, such as Laughlin and Reno that do not have the mass appeal of a Las Vegas, still find it necessary to boost the hotel’s revenue with casino revenue, due to the high cost of rooms and large seasonal visitation fluctuations

When deciding on a casino hotel construction, it is important to understand the market and financial aspects and their impact on overall gaming revenue and profit. Within the free-standing (non-casino) hotel industry, financing terms are usually over 15 to 20 years amortization schedule with a ten year balloon/refinance, and have break-even that ranges from 65% to 70% occupancy. Commonly, casino-related lodging elements enjoy high occupancy levels on weekends, however lower levels during the weekday. It is therefore incumbent not to “build a church for Easter Sunday,” keeping in mind the overall efficient use of the asset.

Furthermore, if the goal is to gain additional casino patronage from a wider market , it is essential to consider the expense of any hotel subsidy versus the potential for an increase in gaming revenues. A new 200 room hotel at a casino which already has thousands of weekend visitors, could only be adding between 2% and 4% more customers, and exposing itself to higher costs. With regard to the use of occasioned, particularly among weekenders and tourists casinos could be competing against other resorts in the region.

Ideally, these types of facilities, which aren’t located in locations that have insufficient local/day-trip markets (e.g. Laughlin) are designed in accordance with their non-gaming and off-peak time support so as to maintain relevant hotel rates and levels of profit. The hotel should also provide the facilities that these markets want which include, if applicable meeting and convention facilities, and indoor/outdoor recreational elements.

Though they’re more of a niche market, RV Park facilities are an investment that is less costly in lodging facilities for overnight stays however they offer some of the same benefits. Based on the most recent statistics, there are more than 9 million households in the United States that own RVs and comprise one of each ten car-owning households. Many of these households include those aged 55 and over group, which have a higher than average gaming propensity and a more substantial annual income.

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

Retail/Outlet Shops

Retail/Outlet shopping is gaining a 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. For instance, the Forum Shops at Caesar’s Palace located in Las Vegas enjoys the highest per square foot sales of all retail malls in the U.S., and the growth in retail sales in the city is surpassing the gaming revenue. The presence of these stores provides both a source of entertainment to the area’s 35 million annual visitors, who are now spending less than 4 hours per day actually playing, as well as a major profit center that is able to leverage the number of visitors.

In less resort destination type outlets, they are significant traffic generators from which a casino facility can draw patrons. On a smaller scale casinos could expand their occasional-use offering by offering unique and local-style shopping that is specially designed to appeal to people from an “adjunctive” daytripper market. The dimensions and features of these stores must be scaled to the potential market, trends in visitation as well as the local ambiance.

Entertainment

Even though entertainment is a staple within casinos, dating in earlier Rat Pack days in Las Vegas to the modern-day imposing arenas and concert venues, as well as specialty shows Their market dynamics are frequently not understood. They’re simultaneously diverting attraction, profit centers, diverting, and public relation instruments. They could also generate major losses, therefore, they should be thoroughly assessed to determine their best setting.

In the case of most major occasions occurring during weekends timeframes, the affluent crowds may not make a huge impact on an already busy period. Therefore , it is imperative to have the particular event organized to at least break even or turn a small profit. Although this is self evident, the more important issue is the entertainment venue’s ability to further be able to amortize the initial expenditure. Outdoor structures can drastically reduce construction costs, but also have a tendency to be subject to seasonal and weather-related use. Moreover, party tents and temporary structures generally don’t have the cache of a permanent location which is an integral component of the casino’s facility.

Recreational Facilities

There is a lot of focus nowadays being paid to the expansion of recreational facilities in casinos, particularly the ones associated with resort developments. Golf courses are a typical adjunct to many resorts, and many Indian communities enjoy the advantage of having access to the ample land areas and water rights these types of enterprises require.

Similar to all the other revenue enhancing reinvestment alternatives discussed herein, recreational facility development should be thought of in the context of its potential to increase the number of casino patrons and/or serve as a profit center. Golfers have traditionally an extremely high level of gaming, the association between golf and gambling isn’t on the same page, considering the length of time to play a typical round. Additionally, even at the most efficient utilization rates, the average 18 hole golf course can only accommodate around 140 players per day, while the average for all-year-round environments is approximately 100 round per day. This isn’t a huge number of players to add to an establishment, even if every one were gamblers, and particularly considering the price of an average course, not including land, which is between $5M to $15M.

However, golf course development as part of a resort package or to fill 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 incorporating fairway home sites, which have an especially high value compared to non-golf course properties. Because of the trust status of Indian lands, this may be somewhat problematical on reservation land, unless some kind of lease for land with a long-term term can be reached with the owners of the homes.
Planning/Financing & Implementation

After all the important market elements have been considered and weighed against their costs in relation to. benefits, a comprehensive expansion and reinvestment program will begin to form. A design and construction team should be established that will help to further understand the program in terms of creativity and value engineering and also maintain its current market position and financial strategy.

It is important to demonstrate how each element is integrated to the overall fabric of the facility and how it will be financed. A portion of the funding may come from the allocation of reserved profits, as well as other funding sources that are independent of additional debt, whose amortization has been considered in the overall feasibility study.

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