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Casino Reinvestment and Expansion

por Marisol Wiese (2020-01-31)


The proper Care & Feeding within the Golden Goose

Under fresh paradigm of declining economic conditions across a broad spectrum of consumer spending, casinos face a unique challenge in addressing the direction they both maintain profitability whilst remaining fair. These factors are further complicated within your commercial gaming sector with increasing tax rates, and within the Indian gaming sector by self imposed contributions to tribal general funds, and/or per capita distributions, in addition to a growing trend in state imposed payments.

Determining what amount to "render unto Caesar," while reserving the requisite funds to maintain market share, grow market penetration and improve profitability, is a daunting task that has to be well planned and executed.

It is within this context and the author's perspective that includes time and grade hands-on experience their development and management of these types of investments, that this article relates ways in order to plan and prioritize an internet casino reinvestment course of action.

Cooked Goose

Although you would have it axiomatic to be able to cook the goose that lays the golden eggs, it is amazing how little thought is oft times given to its on-going proper care and giving. With the advent of a new casino, developers/tribal councils, investors & financiers are rightfully anxious to reap the rewards and there's a tendency in order to mention allocate adequate enough the profits towards asset maintenance & enhancement. Thereby begging this isn't that uncommon of the amount of the gains should be allocated to reinvestment, and towards what goals.

Inasmuch as each project has its own particular involving circumstances, there aren't any hard and fast regulation. For the most part, many for the major commercial casino operators do not distribute net profits as dividends due to their stockholders, but alternatively reinvest them in improvements to their existing venues while also seeking new locations. Some of these programs furthermore funded through additional debt instruments and/or equity stock offerings. The lowered tax rates on corporate dividends will likely shift the emphasis of these financing methods, while still maintaining each video business prudence of on-going reinvestment.
Profit Allocation

As a group, and prior to the current economic conditions, the publicly held companies had a web profit ratio (earnings before income taxes & depreciation) that averages 25% of revenue after deduction of the gross revenue taxes and interest payments. On average, almost two thirds on the remaining income is utilized for reinvestment and asset replacement.

Casino operations in low gross gaming tax rate jurisdictions much more expensive readily able to reinvest in their properties, thereby further enhancing revenues permits eventually benefit the tax podium. New Jersey is a good example, as it mandates certain reinvestment allocations, as an income stimulant. Other states, with regard to example Illinois and Indiana with higher effective rates, run the risk of reducing reinvestment that may eventually erode the ability of the casinos develop market demand penetrations, especially as neighboring states be more competitive. Moreover, effective management can generate higher available profit for reinvestment, stemming from both efficient operations and favorable borrowing & equity attractions.

How an internet casino enterprise decides to allocate its casino profits is often a critical element in determining its long-term viability, and should be an integral aspect of the initial development strategy. While short term loan amortization/debt prepayment programs may at first seem desirable so as to quickly fall out from the particular obligation, these people could also sharply reduce the ability to reinvest/expand on the timely time. This is also true for any profit distribution, whether to investors as well as in the case of Indian gaming projects, distributions to a tribe's general fund for infrastructure/per capita payments.

Moreover, many financiers make blunder of requiring excessive debt service reserves and place restrictions on reinvestment or further leverage which can seriously limit a given project's chance to maintain its competitiveness and/or meet available opportunities.

Whereas figure out how advocating that every one of profits be plowed-back into the operation, are generally encouraging the consideration associated with the allocation program that takes into account the "real" costs of maintaining the asset and maximizing its impact.

Establishing Priorities

There are three essential areas of capital allocation that ought to considered, as shown below and in order of main priority.

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

The first 2 priorities are simple enough to appreciate, due to the fact they have a direct affect on maintaining market positioning and improving profitability, whereas, the third is somewhat problematical in the sense that it has more of an indirect affect that requires an understanding of the market dynamics and greater investment risk. Each and every that are herewith further discussed.

Maintenance & Replacement

Maintenance & Replacement provisions should as being a regular function of the casino's annual budget, which represents a fixed reserve contingent on the projected replacement costs of furniture, fixture, equipment, building, systems and gardening. Too often however we have seen annual wish lists that bear no relationship towards the actual wear & tear of these items. It is therefore important to actually schedule the replacement cycle, allocating funds that do not necessarily have to actually be incurred on year of accrual. Throughout a start-up period it could seem essential to spend any money on replacing brand new assets, however by accruing amounts to be reserved her or his eventual recycling will avoid having to scurry for the funds when they are most needed.

One associated with special consideration is slot machines, whose replacement cycle has been shortening of late, as newer games & technology is developing that has a much higher rate, so the competition dictates.

Cost Savings

Investment in cost savings programs & systems are, by their very nature and in case adequately researched a less risky involving profit allocation funding then almost various other investment. These matters can often take is also important . of new energy saving systems, labor saving products, more efficient purchasing intermediation, and interest reductions.

These items have their caveats, one of these is to thoroughly analyze their touted savings against your own particular application, as in many cases the product claims are exaggerated. Lease buy-outs and long term debt prepayments can be advantageous, specifically the obligations were put into during the development stage when equity funds may been recently limited. Through these cases it is important to from this strategy's net result on the bottom line, opposite with alternative uses of the monies for revenue enhancing/growth investments.

One recent trend could be the growing interest in cash-less slot systems, which not only provide labor savings for fills, counts and hand-pays, but also serve with regard to aid to patrons who do not like to lug around those cumbersome coin buckets, while also encouraging multiple game usage.
Revenue Enhancing & Growth

Leveraging will be the key catalyst of any revenue enhancing/growth related expenditure of money. It includes the following:

o Patronage Base
o Money handy
o Lands
o Marketing Clout
o Management Experience

The principal is to leverage the use of the available asset towards achieving higher revenues & profitability. Typical examples include increasing average patronage base spending and widening the effective trading radius, offering additional products/services, such as retail stores, entertainment alternatives, recreational/leisure amenities, overnight accommodations, more restaurant choices, nicely course, expanded gaming.

Master Planning

Anticipation of potential growth and expansion should be fully integrated into the project's initial master planning if you wish it assure cohesive integration of pay day loan elements in a phased-in program, while also allowing for the least volume of operational being interrupted. Unfortunately, it's not always possible to anticipate market changes, so expansion alternatives must be carefully taken into account.

The Main issue

Before embarking on any involving expansion and/or enhancement program we can't help but recommend first stepping back and assessing the property's present positioning compared to the market and competitive environment. Once we have observed in numerous gaming jurisdictions concerning the country, often casino ventures that have been operating "fat and happy" for several years, find themselves in a zero-growth duration. Sometimes this is due to competition stemming from either/both new local area casinos or regional venues that contain affect of reducing patronage from peripheral area exchanges. Additionally, the current usage may get bored with their experience therefore seeking greener pastures. The historical connected with the Las vegas strip is testament on the success of continually "reinventing" oneself.

Our approach to these market studies is initially focused on determining volume level to which the current facility is penetrating the potential market or in relationship for any competitive market shares. Typically, this represents an research into the current patronage base arrives to of information gleaned on the player tracking data base, and mailing lists, coupled with day-part, daily, weekly, monthly and seasonal revenue movements.

This information is then interfaced with an assessment of the general market potential to indicate the extent this agreement certain market segments are making use of the facility as well as the needs salvaging fulfilling. More importantly however, simple fact that this kind of analysis will indicate those market segments that are not utilizing making a fleet of more fully, and why.

Occasion Segmentation

As our proprietary possess indicated, casino markets are segmented by various characteristics of occasioned-use that incorporate typical spending & visitation patterns. Classic methods of market measurements, including gravity models, usually only weigh the demographic characteristics within your given population, based on revenues achieved in similar markets. However, an occasion segmentation market analysis reveals more detailed information as to the reasons precipitating a casino visit, where did they relate for the benefits being sought, and the degree that the occasion determines average spending and visitation frequency. This type of data mining is more helpful than gravity modeling, in that it guide determine type of of facilities and positioning strategies important attract each market segment, by measuring their relative contribution for the aggregate long run. The process has been successfully used in the restaurant business because leisure time service industries, especially amid a widening supply/demand promote.

Perhaps even more importantly, shopping for the market from an occasioned-use perspective, reveals the extent and characteristics of the underling competition, that, to all cases not only include other casinos, likewise alternative entertainment and leisure time activities, pertaining to example restaurants, clubs, theaters, and the like.

Demand Density

Another important factor of occasion segmentation happens to be in measuring overall market characteristics by day-parts, which is revenue density by age of day, day per week, weekly, monthly, and seasonally. This is specially important data when casino venues are searching for to lessen any higher than normal fluctuations that end up being occurring between a slow Monday morning when a packed Saturday night; or that experience severe seasonal variations.

By segmenting markets by their demand patterns, an easier understanding could be gained of which amenities may help bolster the weak demand periods, and those that may well add to the already maximized peaks.

Many expansion programs often make blunder of configuring additional amenities such as high-end restaurants and lodging elements dependant on the peak demand periods. As a result, give effect of costs & expenses as a consequence of investments can negate any contribution generally make to increased gaming revenues. Rather, "fill-in" finance industry is the most efficient means enhance overall revenues, as they utilize existing capacities. Las vegas has achieved great success in creating strong mid-week activity through promotion of their extensive conference/convention facilities.

Amenity Driven Markets

Another benefit of utilizing occasion-segmentation is being able to also indicate the potential impact certain amenities have on "impelling" visitation rights. While gravity models examine the casino related spending characteristics of your respective given market area, the formulas cannot measure the relative impact of any non-gaming driven activities can nonetheless generate casino visits.

Important data relating for the population's occasioned-use of restaurant, entertainment, and weekend getaways can often form the basis on which to focus amenities made to cater to the people markets; through so doing, increase socializing. Whereas many of these patrons might not makes use of the casino, their exposure for the opportunity may hasten their use, while also creating a lot more profit cardiovascular.

Again, in order to the Nevada paradigm, more and more on the strip properties are now generating as much, not really more, non-gaming revenues than gaming revenues; as their hotels and restaurants are less & less subsidized, and inside addition to their growing retail elements, represent strong contributors towards the bottom line.

Program Development

Once equipped with a basic understanding for the market dynamics, both easy the existing facility's current market shares/penetration rates in relationship to the competitive mix, and the overall occasioned-use of the market, a matrix could be created that sets the demand against the production. This function seeks to identify areas of un-met demand opportunities and/or over supply, that forms the spring-board to the creation of relevant amenities, expansion and upgrade criteria & marketing methods.

Impact Criteria

Essentially a couple of two kinds of expansion/upgrade strategies: subsidized and profit-centers. Subsidized elements might include adding and/or improving amenities that will further widen current gaming market penetration/shares, thusly developing a direct impact growing casino revenues; while profit centers are in order to further leverage current patronage patterns extra spending opportunities, and that have an in-direct influence on gaming traffic. Although many of much more traditional amenities, such as restaurants, hotels, retail shops, entertainment venues and recreational facilities can fall into one or both impeccable premier categories, its important to make the distinction, so as to clearly establish the design/development criteria.

Upgrading/Expansion

As recently been previously discussed, Las Vegas continually seeks to reinvent itself like a means to increase repeat visitation, that alone creates a snowballing affect as each venue must keep-up featuring a neighbor. To some extent upgrading programs, could possibly include making a new and fresher look, is nearly the same as an protection plan against slipping revenues, and do not necessarily refer to any incremental growth by itself. Not to be mistaken for replacement programs of worn carpeting and slot machine game recycling, upgrading program should seek to create new excitement about making a fleet of in relation to ambiance, quality of finishes, layouts, and overall décor.

Expansion of existing capacity is less a function of market analysis and more a function of "making hay while the sun shines," with different thorough idea of the visitation pattern densities. Patron back-ups for gaming positions and restaurant tables can be both good and bad, depending on when they occur and how often. High per position per day net win averages are not always a sign of a prospering casino, as they quite could also mean lost opportunity any an insufficient number of games. Conversely, additional positions are not really going to generate the same averages.

When initially configuring capacities for a unique facility, it is important to fully evaluate the demand patterns into their respective day-part components that will maximize penetration during several periods while minimizing inefficiency - the point where the expenses associated with additional capacity is exceeded by its net income potential.

Food & Beverage Amenities

Within most casino venues, restaurant amenities are "loss leaders," made to retain & attract casino patrons with low prices and great value; yet they come across to both widen occasioned-use of the casino, while representing potential profit centers.

In Nevada, which will be the only state where detailed historical F&B departmental operating results are for sale for casinos, properties with gaming revenues averaging between $20M to $200M showed food operations using a net departmental loss of 1.5% of sales in 2001, versus almost a 14% loss in 1995.

Much in this particular major turnaround is as a result of growth in the number of food outlets, especially more upscale/specialty restaurants, which has spurred sales from 20% of gaming revenue in 1995 to just about 27% in 2001. Moreover, food costs have been reduced sharply from 45% in 1995 to 35% in '01.

As prior discussion on occasion-segmentation revealed, a consumer's choice of a casino visit can sometimes compete to entertainment/leisure time activities, including dining out of. Having a market relevant restaurant facility within the casino can serve appeal to the dining-out destination market, with the casino enjoying its vicinity. Therefore when market conditions indicate changes within a casino's restaurant configuration, concerns to be addressed are how can they be designed to satisfy the current patronage base, widen occasioned-use, and improve profitability.

Lodging Elements

With turnkey hotel development costs ranging between $75K to $350K per available room, a place positioning strategy had had better be well analyzed. Yet we see many such projects undertaken with little understanding belonging to the market dynamics and economic impact.

Nationwide, primarily based on our latest survey, there are 724 casinos around the country; consisted of 442 commercial operations, about half of which are located in Nevada, and 282 Indian gaming venues, of which 209 offer most, if not all, of Las Vegas type (Class III) exercises. Roundly 58% of casinos in the industry gaming sector have co-located hotels, compared with 37% of class III Indian gaming venues, despite their containing previous legislation average number of games.

The high preponderance of hotels within commercial sector owes onto a gaming jurisdictions requiring them; including Nevada (for an unrestricted license) and New jersey. Moreover, much of the Nevada market demand comes from beyond a daytrip radius, making overnight accommodations necessary in order to gain market share. When extrapolating these states from the total, the proportion of all commercial casinos with hotels drops to 50%, by having an average of 312 rooms & 1,183 games.

The obvious advantages of casino lodging units could be ability to draw gaming markets from beyond the typical excursion radius, as well as having a somewhat "captured" market (Casinos with Hotels). Moreover, guest rooms can be another perk-use for player club locations. Hotels also widen a casino's occasioned-use through non-gaming leisure activities & amenities, augmented by the ready associated with gaming, while also representing another profit center (Hotels with Casinos). Additionally, within a traditional lodging setting, a casino/hotel has an aggressive advantage due to its added entertainment prime features.

Among incorporated Las Vegas properties there are more hotel rooms than games, as the city transits from one gaming destination to more that are of a resort & convention lodging. In so doing these properties increased their hotel profitability and investment returns by not needing to offer reduced rates to attract gamers. Whereas, some areas such as Laughlin and Reno, which do not enjoy the critical mass of a Las Vegas, still locate one necessary to supplement their hotel investment with casino revenue, due to low room rates and larger seasonal visitation fluctuations

In configuring a casino hotel development it is therefore important to recognise the market and financial dynamics as well as impact on overall gaming revenue and profits. Within the free-standing (non-casino) hotel industry, financing terms are usually over a 15 to 20 year amortization schedule with a ten year balloon/refinance, and have a break even point that approaches 65% to 70% occupancy. Typical casino based lodging elements enjoy high occupancy levels on the weekends, but low levels weekday. It is therefore incumbent to "build a church for Easter Sunday," keeping in mind the overall efficient standby time with the asset.

Moreover, should the intent is to attract additional casino patronage from a wider market radius, it is to read the cost any specific hotel subsidy versus the potential increase in gaming profits. A new 200 room hotel at an internet casino already generating 20,000 weekend visitors, may possibly be adding 2% to 4% more players, while exposing itself to higher costs. Relating to occasioned-use, especially among tourists and weekenders, casino hotels may also be competing with alternative resorts in the location.

Ideally, these kinds of facilities, you should definitely situated in markets with insufficient local/day-trip markets (e.g. Laughlin), end up being configured on the basis of their non-gaming related and off-peak period support so related to maintain relevant room rates and adequate levels of profitability. Will need to also include those amenities these markets are seeking, including, where applicable: conference and convention facilities, and indoor/outdoor recreational variables.

Albeit more of a niche market, RV Park facilities are a less intensive investment in overnight lodging facilities in which nonetheless offer some of the same benefits. As per the latest data, there costly than 9 million households in fantastic that own RVs, and represent each of every ten vehicle owning households. Most of these households include the 55 & over age groups, who have a compared to average gaming propensity and annual income.

RV Park development costs are well below those for hotels, truly have a significant seasonal use, peaking inside summer months in temperate resort environs and in the winter months in the "snowbird" elements.

Retail/Outlet Shops

Retail/Outlet shopping is gaining a major foothold at casino venues across the particular. First represented by casino logo shops and several high-roller/jackpot-winner positioned boutiques, these stores have now grown into major malls and entertainment centers. The Forum Shops at Caesar's Palace in Las Vegas enjoys the top per sq . ft . sales of all retail malls in the U.S., as well as the growth in retail sales in the city is significantly outpacing regarding gaming cash flow. The presence of these shops serves as both is so popular to the area's 35 million annual visitors, of which are now lowering costs than 4 hours each and every day actually gaming, as well as an enormous profit center that leverages the visitation base.

In less resort destination type markets, outlet malls are strong traffic generators from which a casino facility can draw patronage. On a smaller scale, casinos can widen their occasioned-use by offering unique and indigenous shopping that is principally positioned appeal to the "adjunctive" daytripper store. The extent and characteristics associated with those stores in order to scaled towards potential market, current visitation trends, as well as local aura.

Entertainment

Although entertainment is a mainstay in casino environments, stemming from the Rat Pack days in Las Vegas, to today's imposing concert/arena venues and specialty shows; their market dynamics hard misunderstood. They at once, diversions, attractions, profit centers, and public relation services. They can however, also generate major losses, and therefore should be well studied to ascertain their appropriate configuration.

With most major entertainment events occurring during the weekend periods the attracted audiences may not have any significant impact on a likely already busy period. Therefore it in incumbent that the specific event be structured so to at least break even or turn a small profit. While this is somewhat self evident, better central issue the entertainment venue's capability to also amortize its initial development cost investment. Outdoor facilities can sharply reduce construction costs, but also are prone to weather vagaries and seasonal use. Moreover, party tents and temporary structures tend not to have the cache of just a fixed venue that is a crucial part of the casino surgery center.

Recreational Facilities

There is significantly of attention these days being provided the progression of recreational facilities at casino venues, particularly associated with resort duties. Golf courses are a common adjunct numerous resorts, and many Indian communities enjoy the benefit of having accessibility ample land areas and water rights these types of undertakings require.

As boost the other revenue enhancing reinvestment alternatives discussed herein, recreational facility development should be thought about within the context of ability to generate additional casino patrons and/or serve as a profit center. Whereas golfers traditionally have a high gaming proclivity the association of golf with a casino is accomplishment in sync, given second step . time required for a typical round. Moreover, even under the highest utilization rates, a typical 18 hole golf course will only accommodate about 140 players per day, while the national average in year round environments is about 100 rounds per day. This is not a regarding additional players for the casino, even when all pros gambled, as well as considering the cost of an average course, excluding land, ranging between $5M to $15M.

However, course development included in a resort package and/or to fill a local market demand can have many non-gaming related benefits. From resort development standpoint, a golf course as well as other recreational elements can improve the entire facility's competitive positioning, to the point where its development/operating costs can be recaptured through higher room rates/green fees. Many traditional golf courses also "pencil-out" when incorporating fairway home sites, which have a particularly higher value than non-golf course sites. Given the trust status of Indian lands, may be somewhat problematical on reservation lands, unless some connected with long term land leases could be negotiated for the home vendors.
Planning/Financing & Implementation

Once all of the salient market factors also been considered and weighted against their cost vs. benefits, a comprehensive reinvestment & expansion program can begin to take figure. A design & construction team should be assembled that can help further interpret the program in terms of creative and value engineering input, while maintaining its established market positioning and financial method.

Importantly, plan promises should illustrate how each element will be coordinated into the overall facility fabric and also the manner that will be financed. Some funding can stem from reserved profit allocations, whilst independently funded with additional debt, whose amortization recently been factored in the overall project's feasibility analysis.

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