The Proper Care & Feeding of the Golden Goose

In the current trend of economic decline across the entire spectrum of spending by consumers, casino are facing an unique problem in determining how they can maintain their profitability and remain competitive. This is further complicated in the commercial gaming industry due to rising tax rates as well as within the Indian gaming industry, due to self-imposed payments to tribal general funds and/or per capita distributions, as well as an increasing trend of the levy of fees by the state.

Deciding how amount to “render unto Caesar,” while also reserving the funds to keep market share, increase market share and increase the profitability of your business, is a difficult task that needs to be carefully organized and carried out casino.

In this light and from the perspective of the author, which is based on time and grade-based knowledge of the creation and management of these kinds of investments, that this article discusses methods that can be used to plan and prioritize the casino reinvestment strategy.

Cooked Goose

While it is axiomatic that you should not cook the goose that lay the golden eggs, it’s remarkable how little consideration is given to its ongoing treatment and nutrition. In the case of the new casino, tribal councils, financiers and investors are eager to reap the benefits. However, there is a tendency to not allot enough of the earnings to the maintenance and enhancement of assets. This raises the issue of what percentage of profits should go to the reinvestment process, and to which goals.

Since every project is unique and has specific set of conditions, there aren’t any strict and unchanging rules. In the majority of cases most of the major operators of commercial casinos do not pay net profits in dividends to their shareholders, but instead invest in making improvements to their existing facilities while looking for new venues. Certain programmes are also supported by additional equity or debt offerings. The lower tax rates on dividends from corporations will change the focus on these methods of financing but they will still adhere to the business prudence that is fundamental to ongoing investment reinvestment.
Profit Allocation

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

Casinos operating in low gross gaming tax rates are more likely to invest in their properties, which in turn increases revenues that ultimately increase taxpayers. New Jersey is a good exampleof this, since it requires specific reinvestment allocations as an incentive to increase revenue. Other states, like Illinois and Indiana that have more effective rates, face the risk of cutting down on the amount of reinvestment, which could eventually diminish the capacity of casinos to increase market penetration particularly as states around them are more competitive. Furthermore, a well-run management system can increase the amount of profit available to reinvest, resulting from the efficiency of operations as well as favorable equity and borrowing offerings.

The way a casino company decides to distribute its casino earnings is an important factor in determining its viability over the long term, and should be an essential element of the initial development strategy. Although short-term loan amortization or debt prepayment plans may initially appear appealing to be able to get out of being obligated however, they also drastically limit the capacity to reinvest or expand in a timely manner. This is the case for any distribution of profits either to investors or, in the case of Indian gambling projects distributions to the general fund of the tribe for infrastructure or per capita payments.

Additionally, many lenders make the error of requiring too much reserve for debt service and putting restrictions on reinvestment , or even additional leverage that could seriously restrict a project’s capacity to remain competitive and/or take advantage of opportunities.

While we do not advocate that all profits be reinvested to the business We are urging the idea of an allocation plan which takes into consideration what are the “real” costs of maintaining the asset, and maximizes the impact of this program.

Establishing Priorities

There are three major aspects of the capital allocation that must be considered, as illustrated below, in order of importance.

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

The first two areas are simple enough to comprehend as they directly impact on market positioning and enhancing profitability. However the third one is a bit difficult to comprehend because it has greater of an indirect effect that requires a deeper understanding of the dynamics of markets and higher risk of investment. The entire subject matter is discussed further.

Maintenance & Replacement

Maintenance and replacement provisions must be an integral part of the annual budget of the casino, which is a fixed reserve that is based on projected replacement cost of fixtures, furniture equipment, building systems, and landscaping. We often get annual wish lists which do not correspond to the actual wear and wear and tear of these objects. Therefore, it is crucial to plan the replacement process, allocating money that does not need to be spent during the year of accumulation. In the beginning, it might not be important to spend money for the replacement of brand new assets, but by accruing the funds to reserve to be recycled in the future, you will mean that you do not have to search for funds at times when they are needed most.

One particular area to be considered is the slot machine which have a replacement cycle that has been slowed down in recent times due to the fact that newer games and technology are evolving at a faster rate and in line with what competition dictates.

Cost Savings

Cost savings programs and systems is, by nature, and when properly researched, an investment that is less risky profits allocation funds than almost every other investment. These investments can take the form of innovative energy-saving systems and products that reduce labor costs and more effective purchasing intermediation, as well as interest reductions.

There are some caveats to these products One of them is to analyze the claimed savings in relation to your personal application, since often the claims of the product are exaggerated. Lease buy-outs and prepayments of debt can be beneficial, particularly if the contracts were signed in the early stages of development, when equity funds might have been restricted. In these instances, it is crucial to consider the impact of this strategy in the end, when compared to other ways to use the money to invest in growth or revenue-enhancing investments.

A recent trend is the increasing popularity of cashless slot machines that not only offer the opportunity to save on labor costs for hand-pays, fills and counts and hand-pays, but also provide an aid for customers who don’t want carrying around heavy coin buckets. They also help in encouraging the use of multiple games.
Revenue Enhancing & Growth

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

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

The idea is to maximize the utilization of the existing assets to increase revenues and profitability. Examples of this include increasing the base patronage spending, and expanding the trading area by providing other products or services, like entertainment options, retail stores such as leisure and recreational facilities and overnight accommodation, as well as more restaurants and, of course, expanding gaming.

Master Planning

The anticipation of future expansion and growth should be fully included in the initial master plan so that it ensures a seamless integration of all possible components of a phased-in plan and also allows for the most minimal disruption to operations. It’s often not possible to predict market trends and therefore expansion options must be considered with care.

The Big Picture

Before embarking on any kind of enhancement or expansion program, we recommend taking a step back and looking at the current position of the property in relation to the marketplace and competition. We have seen this in a variety of gaming jurisdictions across the country, often , casino enterprises that were operating “fat and happy” for several years, discover themselves in a period of no growth. This can be due to competition from both new local casinos or regional casinos that are a result of decreasing patronage from the peripheral market areas. In addition, the existing customer base could become dissatisfied with their experiences and seek newer opportunities. The history of the Las Vegas strip is testament to the effectiveness of constantly “reinventing” oneself.

Our approach to these market research is initially centered on determining the extent to that the facility currently in operation is able to penetrate the market, and also in relation to market share of competitors. In general, this is an analysis of the present patronage base based on data gathered from the player database for tracking and mailing lists, in conjunction with daily, weekly, day-part and monthly revenues.

The data is then interspersed to assess the overall market potential to determine how much certain market segments are using the facility, and what needs it meets. But what is more important is that this kind of analysis will reveal markets that aren’t making use of the facility in a more comprehensive manner and the reasons for this.

Occasion Segmentation

Our own research has revealed, the casino market is divided by different characteristics of use-on-occasion, which also includes regular patterns of spending and visitation. Traditional methods of market measurement, such as gravity models, typically evaluate the demographic characteristics of a particular population by comparing revenues in similar markets. However, a segmentation of events market analysis provides more in-depth details about the factors that lead to a visit to a casino and how they relate to the benefits desired, and the extent that the event determines the average amount of money spent and frequency of visits. This kind analysis of information mining can be far superior to gravity modeling because it is able to assist in determining the kind of facilities and positioning strategies needed to draw each market segmentby assessing their contribution to the overall potential. This method is being used successfully 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 taking a look at markets from an event-based view, we can see the scope and nature of the underling competition. This can often, does not just comprise other casinos, as well as other entertainment and leisure activities like restaurants, clubs theatres, restaurants, and the similar.

Demand Density

Another crucial aspect of event segmentation is the measurement of the overall market characteristics by day-parts that is the revenue density based on time of the day, weekday and monthly, weekly and seasonalally. This is particularly important when casinos are trying to limit any more than normal fluctuations that could occur between a quiet Monday morning and a crowded Saturday night, or have extreme seasonal fluctuations.

Through separating markets based on their patterns of demand and patterns, a better understanding will be obtained of which facilities can help boost low demand times, and others that could just add to already high-volume peak periods.

A lot of expansion programs fail to account for the additional facilities like high-end hotels and restaurants in accordance with peak demand times. This means that the total effect of cost and expenses associated with these investments could negate any contribution they could make to a rise in gaming revenue. Instead, “fill-in” markets are the most effective way to boost overall revenue 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 analyze the characteristics of gambling-related spending of a specific market however, they are not able to measure the impact of other non-gaming-related activities that may nevertheless generate casino traffic.

The most important data regarding the frequency of use by people who go to restaurants entertainment, entertainment, and weekends away can form the foundation on the basis of which amenities are designed specifically for these types of markets and, in turn increasing the number of visitors. While many of these customers might or might not use casinos but their exposure to the possibility of using it could increase their usage and create another source of revenue.

Looking at an Las Vegas paradigm, more and more of the Strip properties are producing at least morerevenue from non-gaming than gaming revenue; and their restaurants and hotels are not as subsidized, and together with their increasing retail components are a major contributor towards the overall bottom line.

Program Development

After having a solid knowledge of market dynamics and their impact on the current market share/penetration rates with respect to the competitive mix and the general usage that the marketplace is able to provide, an matrix could be constructed that balances demands against supply. This process aims to pinpoint areas where there is a lack of demand or oversupply, which provides the basis for the development of appropriate facilities, upgrades and expansion guidelines and strategies.

Impact Criteria

There are two kinds of strategies for expansion and upgrade that are subsidized and profit-centers. Subsidized elements could include adding or upgrading amenities that increase the current market share of gaming and thus having a direct effect on the growing revenues of casinos and profit centers are intended to leverage the current patronage patterns by providing additional spending options, and have an indirect effect on the gaming activities. While many of the more traditional facilities, like hotels, restaurants, retail establishments, entertainment venues, and leisure facilities could be classified into either of these categories, it is crucial to distinguish between the two in order to be able to clearly define the criteria for design and development.

Upgrading/Expansion

As previously mentioned, Las Vegas continually seeks to improve its own model to boost repeat visits, which in turn creates an effect of snowballing as every venue has to keep up with its counterparts. In a way, upgrading programs, which could include the creation of a fresh and new appearance, can be as an insurance plan against declining revenues. They do not necessarily correlate to increase in revenue per se. It is not to be confused with the replacement of worn carpeting or slot machine recycling upgrading programs should aim to bring new energy into the building in terms of the ambience, quality of the finishes, layouts, and overall design.

Expanding capacity in existing facilities is not a result of market analysis, and more an issue that of “making hay while the sun shines,” that is based on an understanding of patterns of visitation. Back-ups of patrons to table games and gaming positions are both good and bad, based on the time they happen and how frequently. A high per-position per day net win rates aren’t necessarily a sign of a flourishing casino because they can also indicate missed opportunities due to the insufficient amount of games. In contrast, more positions are not likely to produce the same results.

When determining the capacity of the construction of a new facility, it is essential to analyze the demand patterns and their parts of the day that will allow for maximum utilization during peak times and minimize inefficiency – the point at which the cost for additional capacity are overshadowed by the net profit potential.

Food & Beverage Amenities

In most casinos, the restaurant facilities can be described as “loss leaders,” designed to keep and attract customers to casinos with low costs and a great value. However, they can increase the number of occasions that people can use the casino, as well as being potential profit centers.

In Nevada the only state in which detailed historical F&B departmental operating figures can be found for casino, casinos with gaming revenues that range between $20M and $200M revealed food establishments with an annual loss of 1.5 percent of sales in 2001 against a nearly 14% decline in 1995.

A large part of this dramatic change is due to the increase in restaurants, particularly more specialty/upscale restaurants. This has boosted sales by 20% in the gaming revenue in 1995 to nearly 27 percent in 2001. Additionally, food expenses have dropped dramatically from 45percent in 1995 to 35% in 2001.

As the previous discussion on occasion-segmentation revealed, a consumer’s choice of a casino visit can sometimes compete with other entertainment/leisure time activities, including dining out. A market-relevant restaurant inside the casino could help to draw the dining-out customers and the casino profiting by its proximity. So, when market conditions suggest the need to alter a casino’s restaurant layout, the issues to be answered are what can be done to meet the needs of the current customer base, increase the number of occasions and increase profits.

Lodging Elements

With hotel development costs turnkey that range from $75K to $350K for each room available A strategy for market positioning should be thoroughly researched. We see numerous initiatives being undertaken without a clear knowledge of market dynamics and the economic implications.

In the United States, as per our most recent survey seven24 casinos are operating across the country. They are comprised of 442 commercial enterprises, around 50% of them are in Nevada as well as 282 Indian gaming establishments, of which 209 provide the majority, but not all of Las Vegas kind (Class III) games. Around 58% of casinos within the commercial gaming industry have hotels that are co-located, as compared with 37 percent in the Class III Indian gaming venues, despite having the same average amount of games.

The large proportion of hotels in the commercial industry is due to a few gaming jurisdictions that require hotels, including Nevada (for the unrestricted licence) as well as New Jersey. Additionally, a large portion of Nevada demand for hotels comes from outside a daytrip’s radius which makes overnight accommodation necessary to increase market share. If you take these states as the whole, the proportion of casinos that have hotels decreases by 50% and the average being 312 rooms and 1,183 games.

The main benefit of casinos’ lodging facilities is the ability to draw gamers from outside the normal day-trip area, and also have some sort of “captured” market (Casinos with Hotels). Additionally, guest rooms could be a different incentive for players to earn club points. Hotels can also increase the casino’s opportunities for use by providing facilities and leisure activities that are not based on gaming and are complemented by the readily access to gaming, while being a profit-making center (Hotels with casinos). In addition, in a typical hotel or lodging establishment, a casino is competitive by due to its entertainment options.

In the main Las Vegas properties there are more rooms for hotels than games in the city, which is because it has changed from being a gambling destination to becoming more of a resort and convention center. As a result, these hotels have increased their return on investment and profitability by not having to provide cheap rates to draw gamers. However, certain areas like Laughlin and Reno that do not have the mass appeal of a Las Vegas, still find it necessary to augment their hotel’s investment by generating casino revenues, because of the low rates for rooms and the large fluctuations in visitor numbers during the season.

When deciding on a casino hotel development , it is crucial to be aware of the market and financial dynamics as well as their effect on the overall gaming revenue and profit. In the freestanding (non-casino) hotel sector, the terms of financing typically run over 15 to 20 years amortization plan, with a ten year balloon or refinance, and break-even point which is 65% to 70 percent occupancy. The typical casino-based lodging components have high occupancy during weekends, however lower levels during the weekday. Therefore, it is not necessary to “build a church for Easter Sunday,” taking into mind the long-term efficiency of the property.

Furthermore, if the goal is to draw more gaming patrons from a larger market , it is crucial to assess the value of any hotel subsidies versus the possibility of a rise in the gaming revenue. A brand new hotel with 200 rooms in a casino that already attracts thousands of weekend visitors, could just be adding between 2% and 4% more gamblers, but also it is exposing itself to increased costs. Concerning occasioned-use, particularly among weekenders and tourists casinos could be competing with other resorts in the area.

Ideally, these kinds of facilities, if not located in areas with inadequate local or day-trip markets (e.g. Laughlin) they should be designed according to their non-gaming-related and off-peak period support , so that they can maintain appropriate rates for rooms and a sufficient level of profit. Additionally, they should include the facilities that these markets want which include, if applicable the following: convention and conference facilities as well as outdoor and indoor recreational facilities.

Although they are a smaller segment, RV Park facilities are an investment that is less costly in lodging facilities for overnight stays which can still provide many of the same advantages. According to the most recent data that show there are over nine million people in the United States that own RVs and make up one of the ten households that own a vehicle. A large portion of these households are those aged 55 and over group, which have an above average gambling propensity as well as a higher annual income.

RV Park development costs are significantly lower than hotels however, they typically have a significant use during the season, with the highest in the summer months in resorts with temperate climates, and during winter within the “snowbird” areas.

Retail/Outlet Shops

Shopping at retail/outlet stores is taking a significant presence in 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 within the U.S., and the increase in sales of retail within the area is significantly surpassing the gaming revenue. The presence of these stores is both an attraction for the city’s 35 million annual visitors who now spend less than four hours per day actually playing and an important profit center which leverages the visitor base.

In less resort-style outlets, they are significant traffic generators from which casinos can attract customers. On smaller scales casinos can expand their occasional-use by providing unique and local-style shopping that is specifically designed to draw those who are part of the “adjunctive” daytripper market. The size and nature of these stores must be adapted to the prospective market, the current trends in visitor numbers as well as the local ambiance.

Entertainment

While entertainment is an integral part in casinos, it has its roots in early Rat Pack days in Las Vegas and today’s massive arenas and concert venues, as well as specialty shows and their economics are often under-appreciated. They can be diverting attraction, profit centers, diverting as well as public relations instruments. However, they can result in significant losses, which is why they should be carefully examined to determine the most appropriate arrangement.

Since the majority of major events taking place during weekend times, the crowds that are attracted may not be a significant influence on an already busy time. It is therefore essential to ensure that the event is designed to be able to break even or make a modest profit. Although this is obvious, the more important problem is the venue’s capacity to reduce the initial cost of its expenditure. Outdoor venues can dramatically cut costs for construction, but also have a tendency to be subject to seasonal and weather-related usage. In addition, tents for parties and temporary structures generally don’t have the cache of a permanent venue which is an integral component of the casino’s facility.

Recreational Facilities

There is a lot of focus lately being paid to the creation of leisure facilities at casinos, particularly those that are associated with resorts. Golf courses are an atypical addition to many resorts and numerous Indian communities benefit from the advantages of accessing the vast land area and water rights that these kinds of projects require.

Like all other reinvestment options that increase revenue that are discussed in this article, recreational facility development must be considered in the context of its potential to attract more casino patrons or serve as an income-generating center. While golfers typically have an inclination to gamble, the connection between golf and casinos isn’t on the same page, considering the amount of time needed to play a typical round. Furthermore, even with the most efficient utilization rates, an average 18-hole golf course can only accommodate around 140 players each day, while the average for all seasons is around 100 round per day. It’s not a lot of players to add to casinos, even though every one of them gambled, particularly when you consider the expense of a typical course without land, which ranges from $5 million to $15 million.

However, the development of a golf course in conjunction with a resort package or to meet local market need can provide 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. A lot of traditional golf courses “pencil-out” when incorporating fairway homes, which are an especially high value compared to other golf course sites. Due to the status of trusts on Indian land, this could be a bit problematic on reservation land, unless a form 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 variables have been weighed and weighed against their costs in relation to. advantages, a complete expansion and reinvestment program will begin to form. A design and construction team must be formed to help further define the plan in terms of innovative and valuable engineering input as well as maintaining its existing market position and financial strategy.

The program must show how each component is integrated within the overall fabric of the facility and how it will be funded. Certain funding sources can be derived from reserve profit allocations and others are funded independently by additional debt that has had its amortization included in the overall feasibility study.

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