The Proper Care and Feeding for the Golden Goose
With the changing system of declining economic conditions across a broad spectrum of consumer spending, casinos face the unique challenge of figuring out how they can maintain their profitability while also remaining competitive. These issues are made more complicated within the gaming industry due to rising tax rates and in the Indian gaming sector , by self-imposed contributions to tribal general funds and/or per capita distributions, and an increase in taxes imposed by the government.
The process of determining how much to “render unto Caesar,” while reserving the funds needed to keep market share, increase market penetration and improve profitability is a challenging task that must be meticulously planned and carried out.
In this setting and the author’s viewpoint that ทดลองเล่นสล็อต involves grade and time-based experience in the development and management of these types of investments, that this article relates ways to design and prioritize strategies for reinvesting in casinos.
While it seems logical for a goose to not be cooked that lay eggs of golden color and the golden eggs, it’s surprising how little consideration is at given to its proper care and feeding. With the advent of a new casino, developers/tribal councils, investors , and financiers are rightfully anxious to reap the rewards and they tend to allocate a sufficient amount of the money to maintaining and enhancing the assets. This raises the issue of just how much of the profits should be put towards investment, and for which goals.
Inasmuch as each project has specific situation, there are no hard and strict guidelines. For the most part most of the major commercial casino operators do not distribute their net profits in dividends to their stockholders, instead they invest them in improvements to their existing venues while also searching for new locations. Certain of these programs are paid for by other loans and equity offerings. The lower tax rates on corporate dividends will likely shift the focus on these funding methods, while still maintaining the prudence and business fundamentals of continuing reinvestment.Profit Allocation
As a whole, and prior to the current economic conditions, the publicly held firms had a net profit ratio (earnings before income tax and depreciation) which averaged 25% of income after deducting the total revenue tax and interest payments. On average, two thirds of the remaining profits are used for reinvestment and asset replacement.
Casinos operating in low gross gaming tax rates are more likely to return capital to their properties, thereby further enhancing revenues that will eventually help the tax base. New Jersey is a good example, as it mandates specific reinvestment allocations as a revenue stimulant. Other states, such as Illinois and Indiana that have more effective rates, face the risk of cutting down on investment in reinvestment. This could ultimately diminish the capacity of casinos to grow market demand penetrations particularly as states around them become more competitive. Moreover, effective management can increase the amount of profit available in reinvestment, which is a result of both efficient operations and favorable borrowing & equity offerings.
The way a casino company decides how to spend its casino profits is a crucial factor in determining the viability of its business over time and should be an essential aspect of the initial development strategy. While short-term loan amortization/debt prepayment programs may at first seem appealing in order to be able to get out of under the obligation, they can also sharply reduce the ability to reinvest/expand on a timely basis. This is the case for any profit distribution, whether to investors or, in the case of Indian Gaming projects distributions made to a tribe’s general fund to pay for infrastructure or per capita payments.
Moreover, many lenders make the mistake of demanding excessive reserve for debt service and putting restrictions on reinvestment or additional leverage that could seriously limit a given project’s ability to remain competitive and/or take advantage of opportunities that are available.
Although we don’t advocate the reinvestment of all profits into the operation We are urging the consideration of an allocation plan that is based on the “real” expenses of maintaining the asset and maximizing the impact of this program.
There are three key categories of capital allocation which should be considered, as shown below and in order of importance.
1. Maintenance and Replacement
2. Cost Savings
3. Revenue Enhancement/Growth
The first two aspects aren’t difficult to grasp as they directly impact in maintaining market position and boosting profitability. However the third is more complicated in that it has the potential for more indirect impact that requires a thorough knowledge of market dynamics and higher risk of investment. The three priorities are further are discussed.
Maintenance & Replacement
Maintenance & Replacement provisions should be a regular function of the annual budget for casinos, that is a reserve based on the projected replacement cost of fixtures, furniture, equipment, building, systems and landscaping. Too often however we have annual wish lists that do not reflect the actual wear and tear of these things. Therefore, it is essential to schedule the replacement process, allocating funds that do not need to be used in the year of accrual. In the beginning, it may not be appropriate to spend any money to replace brand new assets, however by the accumulation of funds that are reserved for recycling purposes, it will ensure that there is no need to hunt for funds at times to be used when they’re needed.
A particular area that deserves attention is slot machines and their replacement cycles have decreased in recent months, as newer games & technologies are developing at a higher rate and in line with what competition dictates.
Cost savings programs and systems is in their nature, and provided that they are properly studied, an investment that is less risky profit allocation funding then almost any other investment. These investments can take the form of innovative energy saving systems and products that reduce labor costs that are more efficient in purchasing intermediation and interest reductions.
These products come with their own caveats, one of which is to carefully analyze their claimed benefits against your particular application, as often times claims made by the company are overstated. Lease buy-outs, as well as long-term prepayments on debt can be beneficial, especially if commitments were made during the process of development and equity funds may have been insufficient. In these situations, it’s crucial to analyze the net impact in the end in relation to other possible options for the money to be used for revenue enhancing/growth investments.
One recent trend is the rise in acceptance of cash-less slots which offer labor savings for fills, counts , and hand-pays, but also act as a benefit to those who aren’t keen to carry around cumbersome coin buckets. They also help in encouraging the use of multiple games.
Revenue Enhancing & Growth
Leveraging is the main driving force behind any revenue-enhancing or growth related investment. It includes the following:
• Funds in the Reserve
• Marketing Clout
o Management Experience
The principal is to leverage the use of the available assets to increase revenues and profit. Common examples include increasing average patronage base expenditure and widening the effective trading distance by offering other products or services, like entertainment venues, retail stores recreation and leisure facilities and overnight accommodation, as well as more restaurants, and of course, expanded gaming.
The anticipation of future expansion and growth needs to be fully integrated into plan’s initial master plans to ensure a seamless implementation of the various aspects of a planned-in phase, while also allowing for the least disruption to operation. Unfortunately, it’s not always possible to anticipate market shifts, so expansion alternatives must be carefully considered.
The Big Picture
Before embarking on any type of enhancement and/or expansion program we suggest taking a step back and looking at the current position of the property in relation to the market. As we’ve observed in a variety of gaming jurisdictions across the country, often casinos that were operating “fat and content” for a while, find themselves experiencing a slowing of growth. Sometimes this is due to competition arising from new local area casinos or regional venues which are causing a decline in customer numbers from the peripheral markets. Also, the current clients may be bored with their experience and are seeking greener pastures. The historical growth of the Las Vegas strip is testament to the power of continuously “reinventing” your self.
Our approach to market studies is primarily based on determining that the current facility can penetrate the market, and also in relation to any competitive market shares. In general, this is an analysis of the current patronage base in terms of data gathered from the player database for tracking and mailing lists, coupled with daily, weekly, day-part or monthly income trends.
The information is then correlated with an assessment of the market potential , to show the extent to which certain segments of the market are using the facility and the needs it fulfills. More importantly however, is that this type analysis will reveal segments of the market that are not making use of the facility in a more comprehensive manner and the reasons for this.
Our own research has revealed, the casino market is segmented by various characteristics of event-based use, as well as the typical patterns of spending and visits. The standard methods of market measures, like gravity models, typically evaluate the demographic characteristics of a population by comparing revenues in similar markets. However, an occasion-specific market analysis provides more in-depth details regarding the causes for a casino’s visit as well as how they relate to the benefits being sought, and the degree of the event’s impact on the amount spent and frequency of visits. This kind that uses data mining far superior to gravity modeling as it will aid in determining the best facilities and positioning strategies necessary for each market segment, by measuring their contributions to the total potential. This technique has been used successfully in the restaurant and other industries that provide leisure time services particularly in the context of a growing supply/demand marketplace.
Perhaps more important, looking at this market through an occasioned-use viewpoint, shows the magnitude and nature of the underling competitors, which, often, does not just comprise other casinos, but also alternative entertainment and leisure-time activities including clubs, restaurants, theaters, and others.
Another crucial aspect of event segmentation is to measure the overall market characteristics using day-parts, that is revenue density by time of day, day per week, weekly, monthly and seasonalally. This is especially important data when casinos are trying to lessen any higher than normal fluctuations that could occur between a slow Monday morning and an incredibly busy Saturday night; or that experience severe seasonal variations.
By separating markets according to their patterns of demand in this way, a better understanding could be obtained of which facilities could help to boost the low demand times, and ones that will just add to already heightened peaks.
A lot of expansion programs fail to account for additional amenities such as high-end accommodations and restaurants based on the peak demand times. In the end, the effect of the cost and expenses associated with these investments could negate any contribution they might make to increasing gaming revenues. Instead, “fill-in” markets are the most efficient way to increase overall revenues, as they utilize 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 examine the characteristics of gambling-related spending for a certain market but they cannot quantify the relative impact of any other non-gaming-related activities that may nonetheless generate casino traffic.
Significant data on the use of restaurants by the general public entertainment, entertainment, and weekends away can form the basis on which to target the services that meet the needs of these customers; which in turn, increase visitation. Whereas many of these patrons may or may not utilize the casino however, their exposure to the potential of the casino could encourage their use, while also creating an additional revenue source.
In addition, when we look at the Las Vegas paradigm, more and more strip properties are currently generating more, if not more than gaming revenues; as their restaurants and hotels are not as subsidized, and together with their expanding retail component, represent strong contributors towards the overall bottom line.
Once equipped with a basic knowledge of market dynamics as well as the existing facility’s current market share/penetration ratios in relation to the competitive mix, as well as the overall use in the market. A matrix may be created that sets an equilibrium between the market’s demand and supply. This function seeks to identify areas where there is a lack of demand or oversupply, which serves as the basis for the development of appropriate amenities, expansion and upgrade guidelines and strategies.
In essence, there are two kinds of expansion/upgrade strategies which are profit-centers and subsidized. Subsidized elements can include the addition of or improving facilities that expand the current market share of gaming, thusly having a direct impact on growing casino revenues as well as profit-centers are designed to increase the current patronage patterns by providing additional spending opportunities, and having an indirect effect on the gaming activities. Although many of the typical amenities like hotels, restaurants, establishments, entertainment venues and recreational facilities fall into one or both of these categories. It is crucial to distinguish between the two, so as to clearly establish the design/development criteria.
As we’ve previously talked about, Las Vegas continually seeks to reinvent itself to increase repeat visitation, which in turn creates an effect of snowballing as each venue has to be able to keep pace with its neighbours. Somewhat, upgrading programs, which may involve creating a new and fresher design, functions like an insurance policy against declining revenues. They do not necessarily relate to any increases in revenues per se. It is not to be confused with new carpeting replacement and slot machine recycling, upgrading programs should aim to create new excitement about the facility in terms of design, ambiance, materials, layouts, as well as overall décor.
Expanding the capacity of existing ones is less a function of market analysis, and more a function of “making the most of the time when the sun shines,” that is based on an in-depth knowledge of the pattern of visits density. The back-up of players for table games and gaming positions could be good or bad, based on when they occur and how often. High per position per day net win rates aren’t necessarily a sign of a flourishing casino since they may also signify wasted opportunities due to the insufficient amount of games. Conversely, additional positions are not always going to generate the same results.
When setting up capacities for the construction of a new facility, it is crucial to analyze the demand patterns into their respective parts of the day that will allow for maximum access during peak periods while minimizing inefficiency , the point where the costs associated with additional capacity is exceeded by its net income potential.
Food and Beverage amenities
The majority of casino venues’ dining facilities are “loss toppers,” designed to retain and attract patrons to casinos with affordable prices and a great value; yet they have the ability to both widen occasioned-use of the casino, while also representing potential revenue centers.
In Nevada which is the only state where specific historical F&B departmental operational results are available for casinos casinos that generate gaming revenues between $20M to $200M showed food businesses a net departmental loss of 1.5% of revenue in 2001, versus almost a 14% loss in 1995.
Much of this major shift is due increasing number of restaurants, and particularly specialty/upscale eateries, which has increased sales between 20% and 20% the gaming revenue in 1995, to close to 27% in 2001. Moreover, food costs are down 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. The presence of a restaurant that is market-relevant inside the casino could help to draw the dining-out tourist market as well as benefitting the casino by its proximity. Therefore when market conditions indicate the need to alter a casino’s restaurant arrangement, the main issues to be addressed are what can be done to satisfy the current customers, expand the use of occasioned services, and improve profit.
With the cost of turnkey hotel development ranging between $75K to $350K per available room marketing strategy had better be well studied. Yet we see many such initiatives being undertaken without a clear understanding of the market dynamics and economic impacts.
Nationally, according to our most recent survey seven24 casinos are operating across the nation. These casinos comprise 442 commercial establishments, approximately half of them in Nevada and 282 Indian gaming facilities, of which 209 offer most, in some cases all, 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% from the Class III Indian gaming venues, despite their containing the same average amount of games.
The excessive amount of hotels within the commercial sector owes to some gaming jurisdictions requiring these hotels; for instance, Nevada (for granted licenses that are unrestricted) in addition to New Jersey. Furthermore, the majority of Nevada market demand stems from areas that are beyond a day-trip radius, making overnight accommodations necessary in order to gain market share. If you take these states as the entire, the percentage of all commercial casinos with hotels decreases by 50% and three12 hotels & 1,183 games.
One of the main advantages of hotel and casino units is the ability to draw gambling markets that go beyond the normal day-trip distance, but also offering an essentially “captured” market (Casinos with Hotels). Furthermore, guest rooms may be another incentive to use player club points. Hotels can also increase the possibilities of an casino’s occasioned-use, by providing non-gaming leisure activities & amenities and are complemented by the readily availability of gaming, while being a profit-making center (Hotels with Casinos). Furthermore, within a conventional hotel or lodging establishment, a casino can be competitive due to the due to its entertainment features.
Among the major Las Vegas properties there are more rooms for hotels than games since the city is transitioning from being a gambling destination into a more resort and convention location. These properties have improved their hotel profits and investment returns due to not needing to offer cheap rates to draw gamers. While some regions, such as Laughlin and Reno that do not enjoy the critical mass of one like Las Vegas, still find it necessary to boost their hotel investment by generating casino revenues, because of the low rates for rooms as well as the high frequency of seasonal visits
In the process of determining a casino hotel development , it is essential to know the market’s financial dynamics and their impact on gaming revenues and profit. In the freestanding (non-casino) hotel industry, the financing terms are generally based on a 15 to 20-year amortization plan, which includes a balloon or refinance period of 10 years, and come with a break-even point that is about 65% to 70% occupancy. Commonly, casino-based lodging elements enjoy high occupancy levels on the weekends, but lower levels during the week. It’s therefore not necessary to “build a church for Easter Sunday,” taking into consideration the overall efficient use of the asset.
Moreover, if the intent is to attract additional casino patronage from a wider geographical area, it’s vital to analyze the costs of any hotel subsidy versus the potential growth in the gaming revenue. A new 200 room hotel at a casino which already has 20,000 weekend visitors, may not be attracting 2to 4 percent more players, while exposing the hotel to greater costs. Regarding the issue of occasioned-use particularly among weekenders and tourists casinos could be competing against other resorts in the area.
Ideally, these facilities, when not situated in locations that have insufficient local or day-trip markets (e.g. Laughlin), should be configured according to their non-gaming and off-peak periods of support to keep relevant rates for rooms and a sufficient level of profit. They should also include those amenities that these markets are looking for which include, if applicable the following: convention and conference facilities, and indoor/outdoor recreational elements.
While it is a niche marketplace, RV Park facilities are a less intensive investment in accommodation facilities for overnight stays that nonetheless offer some of the same benefits. According to the latest data that show there are over 9 million families in United States that own RVs and comprise one of the ten households that own a vehicle. A large portion of these households are the 55 and over age group, which have an above average gaming propensity and annual income.
RV Park development costs are much lower than those of hotels They typically see frequent use throughout the year, peaking during summer in resorts that are temperate and in winter during the “snowbird” regions.
Retail and Outlet Shops
Shopping at retail/outlet stores is taking a large 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. The Forum Shops at Caesar’s Palace located in Las Vegas enjoys the highest sales per square foot of all malls that sell retail located in the U.S., and the growth in retail sales of the town is outpacing that of gaming revenue. The existence of these shops provides both a source of entertainment for the city’s 35 million annual guests, who now spend less than 4 hours each day actually playing games, as also a major profit center that leverages the visitation base.
In less resort destination type market, outlet malls are powerful traffic generators from where a casino facility can draw customers. On an individual basis, casinos can widen their occasional-use offering by providing unique and unique shopping options that are specifically designed to draw the “adjunctive” tourist market. The scope and the characteristics of these stores need to be adjusted to the needs of the market, visitor trends and the local atmosphere.
Although entertainment is a mainstay in casinos, it has its roots in earlier Rat Pack days in Las Vegas to the modern-day imposing concert/arena arenas and special shows the market dynamics of these venues are much unappreciated. They’re simultaneously diversions of attractions, profit centers and public relations instruments. However, they can create significant losses therefore, they must be thoroughly studied to determine their appropriate arrangement.
Since the majority of major events taking place during weekend period, the audience that is attracted might not make a huge impact on an already busy period. Therefore it in incumbent that the event be structured so as to be able to break even or turn a small profit. While this is somewhat obvious, the crucial concern is the entertainment venue’s capability to also reduce the initial cost of its and investment. Outdoor venues can dramatically reduce construction costs, but also are susceptible to weather vagaries and seasonal use. Furthermore, tents for parties and temporary structures usually do not have the cache of a permanent location which is an integral component of a casino’s infrastructure.
There is a lot of focus lately being paid to the creation of recreational facilities in casinos, specifically those connected to resort projects. Golf courses are a typical addition to many resorts and many Indian communities enjoy the benefits of having access to the huge land parcels and water rights these types of projects require.
Similar to all the other revenue enhancing reinvestment alternatives mentioned in this article, recreational facilities development should be considered within the context of its potential to generate additional casino patrons and/or serve as an investment opportunity. While golfers typically have a high gaming proclivity the connection between golf and gambling is not on the same page, considering the length of time required to play a typical round. Additionally, even at the most utilized rates, the average 18 hole golf course will accommodate around 140 players daily, while the national average in all-year-round environments is approximately 100 rounds per day. It’s not a lot of additional players for an establishment, even if every one of them gambled, especially when considering the price of a course that is excluding land, ranging between $5 million to $15 million.
However, golf course development in conjunction with a resort’s package and/or to meet local market demand may provide many non-gaming related 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. A lot of traditional golf courses “pencil-out” by incorporating fairway homes that have a particularly higher value than non-golf course locations. With regard to the trust status of Indian lands, this can be a little problematic for reservations areas, unless any kind of long term land leases can be reached with the owners of the homes.
Planning/Financing & Implementation
After all the important market conditions have been assessed and weighed against their cost and. benefits, a comprehensive reinvestment & expansion program can begin to develop. A design & construction team should be set up that will help to further understand the program’s objectives in terms creative and value engineering input as well as maintaining its current market positioning and financial strategy.
Importantly, the program should demonstrate how each component will be integrated within the overall fabric of the facility and the manner in which it will be funded. The funding could be from reserve profit allocations or it could be funded by additional debt and whose amortization has been included in the overall feasibility analysis.