Design A Casino Reinvestment Strategy

The Proper Care & Feeding of the Golden Goose

In the current model of declining economic conditions across the entire spectrum of spending by consumers, casino face the unique challenge of figuring out how they can both sustain their profitability and remain competitive. These issues are made more complicated in the commercial gaming industry with increasing tax rates, and within the Indian gaming industry, due to self imposed contributions to tribal general funds, as well as per capita distributions, in addition to the increasing number of state imposed fees.

The process of determining how much to “render unto Caesar,” and ensuring that you have the necessary funds to maintain market share, grow market penetration , and increase profit margins, is a challenging task that must be well organized and executed casino.

It is within this context and from the perspective of the author, which includes time and grade hands-on knowledge of the creation and administration of these kinds of investments, that this article relates ways to design and prioritize a casino reinvestment strategy.

Cooked Goose

It is common sense that you should not cook the goose who lays the golden eggs, it is astonishing how little attention is given to its continual care and feeding. With the advent of casinos, developers, tribal councils, investors & financiers are rightfully anxious to reap the benefits. There is a tendency not to allocate a sufficient amount of the earnings to maintaining and enhancing the assets. Thus, begging the question what percentage of profits should be allocated to investing in the future, and what goals.

Inasmuch as each project has its own particular set of conditions, there aren’t any strict and unchanging rules. Most of the time all of the major operators of commercial casinos do not distribute net profits in dividends to their shareholders, but instead invest in making improvements to the existing casinos while seeking new locations. Some of these programs are supported by additional debt instruments and/or equity stock offerings. The tax rate reductions for corporate dividends could shift the focus of these funding methods however, they must still maintain the business prudence that is fundamental to continuous reinvestment.
Profit Allocation

In the aggregate and prior to current economic crisis, publicly held companies had a net profit ratio (earnings before income tax and depreciation) that averages 25% of income after the deduction of income tax and interest payments. On average, almost two thirds of the remaining profits are utilized for the reinvestment of profits and asset replacement.

Casino operations in low gross gaming tax rate jurisdictions are more likely to invest in their properties, which in turn increases revenues that will eventually benefit taxpayers. New Jersey is a good instance, as it requires specific reinvestment allocations as an incentive to increase revenue. Other states, including Illinois and Indiana with higher effective rates, run the risk of reducing reinvestment that may eventually erode the ability of the casinos to grow market demand penetrations particularly as states around them are becoming more competitive. Furthermore, a well-run management system can result in higher profits to reinvest, resulting from the efficiency of operations as well as favorable borrowing & equity offerings.

How a casino enterprise decides to distribute its casino earnings is a critical element to determine its long-term viability and should form an integral element of the initial development strategy. While short term loan amortization/debt prepayment schemes may initially appear desirable to quickly come out from obligations, they can also sharply limit the capacity to reinvest or expand quickly. The same is true in the case of any profit distributions either to investors or in the case of Indian gaming , distributions made to a tribal general fund for infrastructure or per capita payments.

Additionally, many lenders make the error of requiring too much reserves for debt service and placing limitations on reinvestment and additional leverage that could seriously limit a given project’s ability to remain competitive and/or make the most of available opportunities.

While we do not advocate that all profits be reinvested to the business We encourage the creation of an allocation program which takes into consideration costs that are “real” costs of maintaining the asset and maximizing its impact.

Establishing Priorities

There are three essential aspects of the capital allocation which should be considered, as demonstrated below in order of priority.

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

The first two areas are simple enough to comprehend, in that they have a direct affect on the market’s positioning and enhancing profitability. However the third option is difficult to comprehend because it has greater of an indirect influence that requires an understanding of the dynamics of markets and more risk to invest. The three priorities are will be discussed in detail.

Maintenance & Replacement

Maintenance and replacement provisions must be an integral part of the annual budget for casinos, which represents a fixed reserve that is based on projected replacement cost of fixtures, furniture and equipment, as well as building systems, and landscaping. We often receive annual lists of wishes that are not correlated with the actual wear and wear and tear of these objects. It is therefore crucial to plan the replacement schedule, distributing the funds that don’t necessarily need to be used during the year of accumulation. In the initial phase, it may not seem important to spend money for replacement of brand-new assets, but by accruing sums to be saved to be recycled in the future, you can help avoid the need to look for the funds in times when they’re needed the most.

One particular area to be considered is slot machines and their replacement cycles have been slowed down in recent times due to the fact that newer games and technologies are developing at a much higher rate and the competitive landscape dictates.

Cost Savings

Investments in cost savings programs Systems and cost savings programs are, by their very nature , if adequately researched a less risky use of profits-allocation funds than any other investment. These investments can take the form of new methods to save energy, labor saving products, more efficient purchasing intermediation, as well as interest reductions.

They come with a few caveats, one of which is to analyze the claimed savings against your own particular application, since often products’ claims are overstated. Lease buy-outs, as well as long-term prepayments on debt can be beneficial, particularly if the contracts were signed during the initial stages of development and equity funds may have been restricted. In these cases it is important to examine the net impact for the business’s bottom line in comparison with alternative uses of the monies for revenue enhancing/growth investments.

One of the recent trends is the rising popularity of cash-less gaming systems which offer labour savings on fills, counts and hand-pays, but also serve as an aid for patrons who do not like to lug around those cumbersome coin buckets. They also help in encouraging multi-game play.
Revenue Enhancing & Growth

Leveraging is the primary driver of any growth or revenue related investment. It includes the following:

o Patronage Base
• Funds in the Reserve
o Lands
• Marketing Clout
o Management Experience

The principal is to leverage the potential of an asset in order to achieve higher revenue & profitability. Some examples are increasing consumption of base patronage and widening the effective trading distance by offering extra products and services, for example, entertainment options, retail stores recreation and leisure facilities, overnight accommodations, more options for dining out and, of course, expanding gaming.

Master Planning

Potential expansion and growth must be included in the initial master planning so as it assure cohesive integration of the possible elements of a phased-in programme, while also allowing for the least disruption to operation. It’s often not possible to predict market trends and therefore expansion options must be carefully considered.

The Big Picture

Before embarking on any kind of enhancement or expansion program, we recommend taking a step back and assessing the present position of the property compared to its market and competitive landscape. We’ve observed that in many gaming jurisdictions across the nation, most casino businesses that have been “fat and happy” for some time, now find themselves in a stagnant period. This can be due to competition from both new regional or local casinos which have the effect of reducing patrons from peripheral market areas. Additionally, the current customer base may get bored of their experiences and seek newer opportunities. The historical growth of the Las Vegas strip is testament to the power of continuously “reinventing” oneself.

Our approach to market studies initially focuses on determining the degree to which the facility’s current operation is reaching out to the market and in relationship to any market share held by competitors. Typically, this represents an analysis of the present patronage base in terms of information gleaned from the player tracker database, as well as mailing lists. This is accompanied by daily, weekly, day-part as well as seasonal and monthly income trends.

The information is then correlated with an assessment of the overall market’s potential to reveal whether market segments are utilizing the facility as well as the needs it fulfills. More importantly however, is that this type of analysis will indicate those market segments that are not making use of the facility in a more comprehensive manner and also the reason for that.

Occasion Segmentation

According to our research shown, the market for casinos is classified by various aspects of occasioned-use that also include typical spending & visitation patterns. The traditional methods of market measurements, including gravity models, generally weigh the demographic characteristics of a given population, with respect to the revenues that are generated in similar markets. However, a occasion segmentation market analysis gives more specific information about the causes for a casino’s visit, how they relate to the benefits attained, and the extent to which an event influences the amount spent and frequency of visits. This kind analysis of information mining can be far more helpful than gravity modeling as it will assist in determining the best infrastructure and positioning strategies required to draw in each market segment, by analyzing their contribution to the global potential. The method is used with success in the restaurant industry and other industries of leisure time particularly in the context of a growing supply/demand marketplace.

Perhaps more important taking a look at the market from an occasioned-use standpoint, you can observe the size and characteristics of the underling competitors, which, typically, does not include other casinos, but also other entertainment options and leisure activities like clubs, restaurants theaters, etc. like.

Demand Density

Another important aspect of occasion segmentation is measuring general market characteristics using day-parts and income density by day, day per week daily, monthly, and seasonally. This is especially important data when casino venues want to limit any more than normal fluctuations that might occur between a quiet Monday morning and a busy Saturday night; or that 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 could help to boost the weak demand periods, and others that could just add to already high-volume peaks.

A majority of expansion plans are prone to complication when they design extra amenities like luxury accommodation and dining establishments according to peak demand times. This means that the effect of the charges and expenses for these investments can negate any contribution they may make to increased gaming revenues. Rather, “fill-in” markets are the most effective way to increase overall revenues, 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 focus on the gambling spending characteristics of a specific market but the formulas are unable to determine the influence of non-gaming related activities that can however generate casino-related traffic.

The most important data regarding the use of restaurants by the general public entertainment, entertainment and weekends getaways are often the basis on what to target the amenities specifically for these types of markets and in the process increasing the number of visitors. While a lot of the patrons may or not visit the casino but their exposure to the potential of the casino could encourage their use in addition to creating an additional source of income.

Again, looking to looking at the Las Vegas paradigm, more and more of the Strip properties are producing as much, if not more than gaming revenues; as their restaurants and hotels are not as subsidized, and in addition to their increasing retail element contribute significantly for the profit line.

Program Development

After having a solid understanding of the market dynamics as well as the current market shares and penetration rates in relation to the mix of competitors, and also the overall usage that the marketplace is able to provide, an matrix may be developed that sets demands against supply. This function seeks to identify areas of un-met demand opportunities or oversupply, which provides the basis for the creation of suitable amenities, upgrades, and expansion criteria & strategies.

Impact Criteria

The basic idea is that there are two kinds of upgrades and expansion strategies such as profit-centers and those that are subsidized. Subsidized elements could include adding and/or upgrading amenities that enhance the market for gaming and share which will have a direct effect on the growing revenues of casinos as well as profit-centers are specifically designed to boost existing patronage patterns, providing more spending options, and have an indirect effect on the gaming activities. Although many of the more conventional amenities, such as hotels, restaurants, retail establishments, entertainment venues, and leisure facilities could fall into one or both of these categories. However, it’s important to make the distinction in order to be able to clearly define the criteria for design and development.

Upgrading/Expansion

As we’ve previously talked about, Las Vegas continually seeks to reinvent its own model to increase repeat visitation, which, in turn, creates a snowballing affect as each location must stay on top of the other venues. Somewhat, updating programs, such as giving a brand new and modern appearance, can be as an insurance plan against falling revenues, and does not necessarily correlate to incremental growth per se. It is not to be confused with replacement programs of worn carpeting or slot machine recycling an upgrade program should seek to increase the excitement surrounding the facility in terms of atmosphere, the quality of the finishes, layouts, and overall design.

Expanding capacity in existing facilities is less the result of market analysis and more an act that of “making hay while the sun shines,” that is based on an accurate understanding of patterns of visitors. Back-ups of patrons to table games and gaming positions can be both good and bad, based on the time they occur and how often. A high per-position per day net wins are not necessarily indicative of a profitable casino, because they can also indicate lost opportunity because of the insufficient amount of games. Conversely, additional positions are not always going to generate the same numbers.

When determining the capacity of the construction of a new facility, it is important to thoroughly analyze demands patterns into their parts of the day that will allow for maximum capacity during peak periods and minimize inefficiency – the point at which the cost associated with additional capacity is more than its net revenue potential.

Food & Beverage Amenities

In most casinos, restaurants include “loss leaders,” designed to keep and attract gamblers at a low cost and a great value. However, they also have the potential to increase the number of occasions that people can use the casino, and also providing potential profit-making opportunities.

In Nevada which is the only state in which detailed historical F&B departmental operating results have been made available for casinos, properties with gaming revenues averaging between $20M and $200M revealed food-related operations generating a net departmental loss of 1.5% of sales in 2001 in contrast to a near 14% decline in 1995.

The main reason for this significant improvement is due to rise in food outlets, especially more specialty/upscale restaurants. This has increased sales between 20% and 20% gaming revenues in 1995 to nearly 27 percent in 2001. In addition, food costs are down dramatically, from the 45% of 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. In addition, having a relevant restaurant establishment within the casino could help to draw the dining-out customer as well as benefitting the casino from its close proximity. Therefore when market conditions indicate changes to a casino’s dining configuration, the questions to be considered are how they can be designed to meet the needs of the current clientele, improve occasioned-use and increase profit.

Lodging Elements

With the cost of turnkey hotel development in the range of $75K-$350K for each room available marketing strategy must be carefully studied. But we are seeing many projects being developed without understanding of the dynamics of the market and the economic implications.

In the United States, as per our most recent survey there are 724 casinos around the nation. These casinos comprise 442 commercial establishments, approximately 50% of them are in Nevada and 282 Indian gaming venues, out of which 209 are home to the majority, but not all of Las Vegas type (Class III) games. Around 58% of casinos operating in the commercial gaming industry have co-located hotels with 37 percent in classes III Indian gaming venues, even though they have similar amounts of games.

The dominance of hotels in the commercial market is due to certain gaming jurisdictions that require hotels, including Nevada (for granted licenses that are unrestricted) along with New Jersey. In addition, the majority of Nevada market demand stems from beyond a daytrip radius so overnight accommodations are required for gaining market share. If you take these states as the total, the percentage of casinos that have hotels decreases to 50%, with three12 hotels and 1,183 games.

The main benefit of casino lodging units is that they can attract gambling markets outside of the typical day trip area, and also have some sort of “captured” market (Casinos with Hotels). Moreover, guest rooms can be another incentive to use player club points. Hotels also widen the possibilities of an casino’s occasioned-use, by providing other leisure and entertainment options that aren’t gaming that are enhanced by the quick access to gaming, while they also serve as a profitable profit center (Hotels with casinos). Additionally, within a traditional hotel or lodging establishment, a casino offers a distinct advantage over other hotels by thanks to its additional entertainment amenities.

Within the top Las Vegas properties there are more hotel rooms than games, as the city transits from being a gambling destination to becoming a more destination for conventions and resorts. By doing this, the hotels have increased their profit and investment return by not needing to offer low rates to attract gamers. However, certain areas such as Laughlin and Reno, which do not benefit from the massive crowd of a Las Vegas, still find it necessary to supplement their hotel’s investment by generating casino revenues, because of the low rates for rooms and the high frequency of seasonal visits

In determining the best way to structure a casino development it is therefore important to be aware of the market and financial dynamics and their impact on gaming revenues and profits. In the freestanding (non-casino) hotel sector, the terms of financing generally run on a 15 to 20 year amortization timeframe, with a 10 year balloon/refinance, and have break-even that is between 65% and 70% occupancy. Commonly, casino-related lodging elements are occupied at high levels on weekends, but low levels weekday. Therefore, it’s not a must to “build a church for Easter Sunday,” keeping in mind the overall efficient use of the asset.

Furthermore, if the goal is to attract additional customers to casinos from a greater market , it is essential to consider the expense of any hotel support versus the potential increase in the gaming revenue. A brand new hotel with 200 rooms at a casino which already has around 20,000 weekend visitors could only be adding between 2% and 4% more gamblers, but also the hotel is also exposing itself for higher cost. With regard to the use of occasioned, particularly for weekend visitors and tourists Casino hotels could also be competing against other resorts in the area.

Ideally, these types of facilities, when not situated in areas with inadequate local or day-trip markets (e.g. Laughlin) and should be set up in line with their non-gaming and off-peak period support , so as to ensure that they maintain the appropriate hotel rates and levels of profitability. They should also include those amenities that these markets are looking for, including, where applicable: conference and convention facilities and outdoor/indoor recreational features.

While it is a niche sector, RV Park facilities are an investment that is less costly in hotels however they offer similar benefits. According to the most recent data that show there are over 9 million households in the United States that own RVs and comprise one of 10 households with vehicles. Many of these households include those over 55 and over age groups, with 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 large number of visitors during the peak season. This is in summertime in resorts that are temperate and during winter when they are located in “snowbird” areas.

Retail/Outlet Shops

Retail/Outlet shopping is gaining a significant presence in 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 in Las Vegas enjoys the highest per square foot sales of all malls that sell retail within the U.S., and the expansion of retail sales within the area is significantly surpassing the gaming revenue. The presence of these stores provides both a source of entertainment to the city’s 35 million annual visitors, which are spending less than four hours a day actually playing as well as an important profit center that leverages the visitation base.

In smaller resort-style markets, outlet malls can be strong traffic generators from which casinos can gain customers. On an individual basis casino, they can broaden their occasional-use by providing unique and distinctive shopping experiences that are specifically designed to draw those who are part of the “adjunctive” daytripper market. The size and nature of these stores need to be tailored to the potential market, visitor trends as well as the local ambiance.

Entertainment

Although entertainment is a mainstay in casinos, ranging from the Rat Pack days in Las Vegas as well as today’s impressive arenas and concert venues, as well as specialty shows the market dynamics of these venues are much under-appreciated. They can be diverting of attractions, profit centers and public relations instruments. However, they can also generate major losses, so they must be examined to determine the most appropriate setting.

The majority of major entertainment occasions occurring during weekends period, the audience that is attracted might not have a major impact on a likely already busy time. So it is essential to ensure that the event is structured so as that it is able to break even or make a modest profit. While this is somewhat evident, the central problem is the venue’s capability to be able to amortize the initial of investment. Outdoor venues can significantly reduce the cost of construction, however they also are prone to weather vagaries and seasonal usage. Additionally, party tents and temporary structures typically are not as well-known of a permanent venue that forms an integral part of the casino’s facilities.

Recreational Facilities

There is a lot of interest lately being paid to the construction of recreational facilities at casinos, especially those associated with resort projects. Golf courses are a typical component of many resorts and numerous Indian communities have the benefit of being able to access the ample land areas and water rights these types of enterprises require.

Like all other revenue enhancing reinvestment alternatives discussed herein, recreational facility development should be considered within the context of its capacity to increase the number of casino patrons as well as serve as profit-making center. Whereas golfers traditionally have an intense gaming habit, the association of golf with casinos isn’t on the same page, considering the amount of time needed to play a typical round. Moreover, even under the highest utilization rates, an average 18-hole golf course will only accommodate approximately 140 people per day, while the average for year round environments is about 100 times per day. This isn’t a huge number of additional players for casinos, even though every one were gamblers, and particularly when you consider the expense of a standard course not including land, which is between $5 million and $15 million.

However, a golf course’s development within a package for resorts and/or to meet local market demand may provide numerous non-gaming benefits. From a resort development standpoint, a golf course as well as other recreational elements can add to the facility’s competitive positioning, to the point where its development/operating costs can be recaptured through higher room rates/green fees. Traditional golf courses often “pencil-out” when incorporating fairway home sites, which have an especially high value compared to non-golf course properties. Due to the status of trusts on Indian land, this might be problematic for reservation areas, unless any kind of long-term lease could be negotiated for the home owners.
Planning/Financing & Implementation

When all of the key market elements have been considered and weighted against their cost against. advantages, a complete expansion and reinvestment strategy will begin to develop. A design & construction team must be formed that will help to further understand the program’s objectives in terms creative and value engineering input as well as maintaining its existing market position and financial strategies.

Importantly, the program should illustrate how each element will be integrated to the overall fabric of the facility and how it will be financed. The funding could be from reserve profit allocations or it could be funded by additional debt, whose amortization has been factored into the overall project’s feasibility study.

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