Casino Reinvestment And Expansion

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The appropriate Care & Feeding associated with the Golden Goose

Under the new paradigm of declining economic conditions across an easy spectral range of consumer spending, casinos face an original challenge in addressing the way they both maintain profitability while also remaining competitive. These factors are further complicated inside the 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, along with an evergrowing trend in state imposed fees.

Determining how much to "render unto Caesar," while reserving the requisite funds to keep market share, grow market penetration and improve profitability, is a daunting task that needs to be well planned and executed.

It is inside this context together with author's perspective which includes some time grade hands-on experience with the growth and management of these kinds of investments, that this short article relates ways that to plan and prioritize a gambling establishment reinvestment strategy.

Cooked Goose

Although it appears to be axiomatic not 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 feeding. Using the advent of a fresh casino, developers/tribal councils, investors & financiers are rightfully anxious to reap the rewards and there is a tendency to not ever allocate a sufficient amount of the profits towards asset maintenance & enhancement. Thereby begging the question of the amount of associated with profits must certanly be allotted to reinvestment, and towards what goals.

Inasmuch as each project has its own particular collection of circumstances, there are no hard and fast rules. For the most part, lots of the major commercial casino operators do not distribute net profits as dividends with their stockholders, but instead reinvest them in improvements to their existing venues while also seeking new locations. A few of these programs are also funded through additional debt instruments and/or equity stock offerings. The lowered tax rates on corporate dividends will probably shift the emphasis among these financing methods, while still maintaining the core business prudence of on-going reinvestment.
Profit Allocation

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

Casino operations in low gross gaming tax rate jurisdictions are more readily in a position to reinvest in their properties, thereby further enhancing revenues which will eventually benefit the tax base. Nj-new jersey is a good example, as it mandates certain reinvestment allocations, as a revenue stimulant. Other states, such as Illinois and Indiana with higher effective rates, run the possibility of reducing reinvestment which will eventually rot the ability regarding the casinos to cultivate market demand penetrations, especially as neighboring states become more competitive. Moreover, effective management can generate higher available profit for reinvestment, stemming from both efficient operations and favorable borrowing & equity offerings.

How a casino enterprise decides to allocate its casino profits is a crucial aspect in determining its long-term viability, and may be an integral facet of the initial development strategy. While short term loan amortization/debt prepayment programs may in the beginning seem desirable in order to quickly turn out from beneath the obligation, they are able to also sharply lower the capability to reinvest/expand on a timely basis. This is especially valid for almost any profit distribution, whether or not to investors or perhaps in the case of Indian gaming projects, distributions to a tribe's general fund for infrastructure/per capita payments.

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

Whereas we are not advocating that all profits be plowed-back into the operation, our company is encouraging the consideration of an allocation program that takes into account the "real" costs of maintaining the asset and maximizing its impact.

Establishing Priorities

You can find three essential regions of capital allocation that needs to be considered, as shown below plus in order of priority.

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

The initial two priorities are easy enough to appreciate, for the reason that they have an immediate affect on maintaining market positioning and improving profitability, whereas, the next is somewhat problematical for the reason that it offers more of an indirect affect that requires an awareness of this market dynamics and greater investment risk. All aspects that are herewith further discussed.

Maintenance & Replacement

Maintenance & Replacement provisions ought to be a regular function of the casino's annual budget, which represents a fixed reserve in line with the projected replacement costs of furniture, fixture, equipment, building, systems and landscaping. All too often however we see annual wish lists that bear no relationship into the actual wear & tear of these items. It is important to actually schedule the replacement cycle, allocating funds that do not necessarily have to actually be incurred in the year of accrual. During a start-up period it may not seem essential to spend any money on replacement of brand new assets, however by accruing amounts to be reserved because of their eventual recycling will avoid having to scurry when it comes to funds if they are most needed.

One area of special consideration is slot machine games, whose replacement cycle has been shortening of late, as newer games & technologies are developing at a much higher rate, so that as the competition dictates.

Cost Benefits

Investment in cost savings programs & systems are, by their very nature if adequately researched a less risky usage of profit allocation funding then just about any other investment. These things can frequently make the as a type of new energy preservation systems, labor saving products, more efficient purchasing intermediation, and interest reductions.

These items have their caveats, one of that will be to thoroughly analyze their touted savings against your personal particular application, as frequently times the item claims are exaggerated. Lease buy-outs and long haul debt prepayments can sometimes be advantageous, particularly when the obligations were entered into throughout the development stage when equity funds might have been limited. In such cases it is critical to understand this strategy's net effect on the conclusion, in comparison 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 just provide labor savings for fills, counts and hand-pays, but also serve as an aid to patrons that do nothing like to lug around those cumbersome coin buckets, while also encouraging multiple game usage.
Revenue Enhancing & Growth

Leveraging is the key catalyst of every revenue enhancing/growth related investment. It offers the annotated following:

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

The main would be to leverage the employment of the available asset towards achieving higher revenues & profitability. Typical for example increasing average patronage base spending and widening the effective trading radius, by offering additional products/services, such as for instance retail stores, entertainment alternatives, recreational/leisure amenities, overnight accommodations, more restaurant choices, and of course, expanded gaming.

Master Planning

Anticipation of potential growth and expansion must be fully incorporated into the project's initial master planning so because it assure cohesive integration associated with the possible elements in a phased-in program, while also allowing for the least level of operational interruption. Unfortunately, it isn't always possible to anticipate market changes, so expansion alternatives must be carefully considered.

The Picture As A Whole

Before embarking on any kind of expansion and/or enhancement program we highly recommend first stepping back and assessing the house's present positioning relative to the marketplace and competitive environment. Once we have observed in various gaming jurisdictions all over country, often casino ventures that have been operating "fat and happy" for a few years, find themselves in a zero-growth period. Sometimes this can be as a result of competition stemming from either/both new geographic area casinos or regional venues which have the affect of reducing patronage from peripheral area markets. Additionally, the current client base could become uninterested in their experience and so are seeking greener pastures. The historical development of the Las Vegas strip is testament to the success of continually "reinventing" oneself.

Our way of these market studies is initially focused on determining their education to that your current facility is penetrating the potential market and in relationship to virtually any competitive market shares. Typically, this represents an analysis of this current patronage base with regards to information gleaned through the player tracking data base, and e-mail lists, coupled with day-part, daily, weekly, monthly and seasonal revenue trends.

This information is then interfaced with an evaluation associated with overall market potential to indicate the extent to which certain market segments are utilizing the facility and the needs it is fulfilling. More importantly however, is the fact that this sort of analysis will indicate those market segments that aren't utilizing the facility more fully, and just why.

Occasion Segmentation

As our proprietary research reports have indicated, casino markets are segmented by various characteristics of occasioned-use which also include typical spending & visitation patterns. The traditional types of market measurements, including gravity models, usually only weigh the demographic characteristics of a given population, based on revenues achieved in similar markets. However, an occasion segmentation market analysis reveals more descriptive information regarding the reasons precipitating a gambling establishment visit, the way they relate to the benefits being sought, additionally the degree to that your occasion determines average spending and visitation frequency. This kind of data mining is far more helpful than gravity modeling, in that it will also help determine the sort of facilities and positioning strategies required to attract each market segment, by measuring their relative contribution towards the aggregate potential. The process happens to be successfully employed in the restaurant business as well as other free time service industries, especially amid a widening supply/demand marketplace.

Possibly even more to the point, studying the market from an occasioned-use perspective, reveals the extent and characteristics associated with underling competition, that, in many cases not only include other casinos, but additionally alternative entertainment and leisure time activities, such as restaurants, clubs, theaters, and so on.

Demand Density

Another essential part of occasion segmentation is within measuring overall market characteristics by day-parts, that is revenue density by period of day, day per week, weekly, monthly, and seasonally. This might be especially important data when casino venues are searhing for to minimize any more than normal fluctuations that could be occurring between a slow Monday morning and a packed Saturday night; or that experience severe seasonal variations.

By segmenting markets by their demand patterns, a significantly better understanding could be gained of which amenities may help bolster the weak demand periods, and those that will only add to the already maximized peaks.

Many expansion programs often make the mistake of configuring additional amenities such as high-end restaurants and lodging elements in line with the peak demand periods. As a result, the net effectation of costs & expenses for those investments can negate any contribution they might make to increased gaming revenues. Rather, "fill-in" markets would be the most effective means to increase overall revenues, as they utilize existing capacities. Las Vegas has achieved great success in creating strong mid-week activity through promotion of the extensive conference/convention facilities.

Amenity Driven Markets

Another advantage of utilizing occasion-segmentation is its ability to also indicate the possibility impact certain amenities have on "impelling" visitation. While gravity models examine the casino related spending characteristics of a given market area, the formulas cannot measure the relative impact of every non-gaming driven activities that may nonetheless generate casino traffic.

Important data relating to the population's occasioned-use of restaurant, entertainment, and weekend getaways can often form the foundation on which to focus amenities built to appeal to these markets; and by so doing, increase visitation. Whereas a majority of these patrons may or may not make use of the casino, their experience of the ability may hasten their use, while also creating an additional profit center.

Again, trying to the Las vegas, nevada paradigm, increasingly more of this strip properties are now generating as much, if not more, non-gaming revenues than gaming revenues; because their hotels and restaurants are less & less subsidized, and with their growing retail elements, represent strong contributors to the bottom line.

Program Development

Once loaded with a basic knowledge of the marketplace dynamics, in both regards to the current facility's current market shares/penetration rates in relationship to the competitive mix, as well as the overall occasioned-use associated with the market, a matrix can be created that sets the demand contrary to the supply. This function seeks to spot aspects of un-met demand opportunities and/or over supply, that forms the spring-board into the development of relevant amenities, expansion and upgrade criteria & strategies.

Impact Criteria

Essentially there are two main forms of expansion/upgrade strategies: subsidized and profit-centers. Subsidized elements can sometimes include adding and/or improving amenities that will further widen current gaming market penetration/shares, thusly having an immediate effect on growing casino revenues; while profit centers are created to further leverage current patronage patterns with additional spending opportunities, and achieving an in-direct influence on gaming activity. Although many of this more conventional amenities, such as restaurants, hotels, retail shops, entertainment venues and recreational facilities can fall under one or both of these categories, its important to help make the distinction, to be able to clearly establish the design/development criteria.

Upgrading/Expansion

As happens to be previously discussed, Las Vegas continually seeks to reinvent itself as a way to boost repeat visitation, that in itself creates a snowballing affect as each venue must keep-up featuring its neighbor. To some degree upgrading programs, which could include creating a brand new and fresher look, is a lot like an insurance policy against slipping revenues, and don't necessarily relate to any incremental growth by itself. To not be mistaken for replacement programs of worn carpeting and video slot recycling, an upgrade program should seek to produce new excitement in regards to the facility with regards to of ambiance, quality of finishes, layouts, and overall décor.

Expansion of existing capacity is less a purpose of market analysis and much more a function of "making hay even though the sun shines," predicated on an extensive comprehension of the visitation pattern densities. Patron back-ups for gaming positions and restaurant tables may be both negative and positive, dependent on when they occur and how often. High per position a day net win averages are not necessarily an indication of a prospering casino, while they may also mean lost opportunity as a result of an insufficient number of games. Conversely, additional positions are not at all times going to generate exactly the same averages.

When initially configuring capacities for an innovative new facility, you will need to fully assess the demand patterns in their respective day-part components which will maximize penetration during the peak periods while minimizing inefficiency - the point where the expenses related to 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 affordable prices and great value; yet they usually have the capacity to both widen occasioned-use of the casino, while also representing potential profit centers.

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

Much of this major turnaround is due to the growth in the wide range of food outlets, especially more upscale/specialty restaurants, which has spurred sales from 20% of gaming revenue in 1995 to almost 27% in 2001. Moreover, food costs have already been reduced sharply from 45% in 1995 to 35% in '01.

Due to the fact previous discussion on occasion-segmentation revealed, a consumer's selection of a casino visit will often take on other entertainment/leisure time activities, including dining out. Having a market relevant restaurant facility in the casino can serve to attract the dining-out destination market, aided by the casino benefiting from its proximity. Therefore when market conditions indicate changes in a casino's restaurant configuration, the questions to be addressed are just how can they be designed to match 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 market positioning strategy have to be well studied. Yet we come across many such projects undertaken with little comprehension of the marketplace dynamics and economic impact.

Nationwide, relating to our most recent survey, you will find 724 casinos around the country; made up of 442 commercial operations, approximately half of which are based in Nevada, and 282 Indian gaming venues, of which 209 offer most, if you don't all, of Las vegas, nevada type (Class III) games. Roundly 58% of casinos in the industry gaming sector have co-located hotels, weighed against 37% of Class III Indian gaming venues, despite their containing an identical average wide range of games.

The high preponderance of hotels in the commercial sector owes for some gaming jurisdictions requiring them; including Nevada (for an unrestricted license) and nj-new jersey. Moreover, a lot of the Nevada market demand stems from beyond a daytrip radius, making overnight accommodations necessary to be able to gain market share. When extrapolating these states through the total, the percentage of all of the commercial casinos with hotels drops to 50%, with an average of 312 rooms & 1,183 games.

The most obvious features of casino lodging units is their capacity to attract gaming markets from beyond the standard day trip radius, while also having a somewhat "captured" market (Casinos with Hotels). Moreover, guest rooms may be another perk-use for player club points. Hotels also widen a gambling establishment's occasioned-use by offering non-gaming leisure activities & amenities, augmented by the ready option of gaming, while also representing another profit center (Hotels with Casinos). Additionally, within a normal lodging setting, a casino/hotel has a competitive advantage by virtue of its added entertainment features.

One of the major Las Vegas properties there are many rooms in hotels than games, as the city transits from a gaming destination to more of a resort & convention destination. In that way these properties increased their hotel profitability and investment returns by without having to provide low rates to attract gamers. Whereas, some areas such as for instance Laughlin and Reno, which do not take pleasure in the critical mass of a Las Vegas, still believe it is required to supplement their hotel investment with casino revenue, as a result of low room rates and large seasonal visitation fluctuations

In configuring a gambling establishment hotel development it is therefore important to comprehend the market and financial dynamics and their impact on overall gaming revenue and profits. Inside the free-standing (non-casino) hotel industry, financing terms are often over a 15 to 20 year amortization schedule with a ten year balloon/refinance, and also a rest even point that approaches 65% to 70% occupancy. Typical casino based lodging elements enjoy high occupancy levels in the weekends, but lower levels weekday. It is therefore incumbent to not ever "build a church for Easter Sunday," keeping in your mind the entire efficient use of the asset.

Moreover, in the event that intent is to attract additional casino patronage from a wider market radius, it is essential to evaluate the price of any hotel subsidy versus the potential boost in gaming profits. An innovative new 200 room hotel at a casino already generating 20,000 weekend visitors, might only be adding 2% to 4% more players, while exposing itself to higher costs. In regards to occasioned-use, especially among tourists and weekenders, casino hotels can also be competing with alternative resorts in the region.

Ideally, these kinds of facilities, you should definitely located in markets with insufficient local/day-trip markets (e.g. Laughlin), must certanly be configured based on their non-gaming related and off-peak period support in order to maintain relevant room rates and adequate amounts of profitability. They need to likewise incorporate those amenities these markets would like, including, where applicable: conference and convention facilities, and indoor/outdoor recreational elements.

Albeit more of a niche market, RV Park facilities are a less intensive investment in overnight lodging facilities that can nonetheless offer a number of the same benefits. In accordance with the latest data, there are many than 9 million households in america that own RVs, and represent one of any ten vehicle owning households. A majority of these households range from the 55 & over age ranges, who have a greater than average gaming propensity and annual income.

RV Park development costs are well below those for hotels, but usually have a higher seasonal use, peaking during summer time months in temperate resort environs plus in the wintertime months when you look at the "snowbird" areas.

Retail/Outlet Shops

Retail/Outlet shopping is gaining a significant foothold at casino venues in the united states. First represented by casino logo shops and a few high-roller/jackpot-winner positioned boutiques, these stores have finally grown into major malls and entertainment centers. The Forum Shops at Caesar's Palace in Las vegas, nevada enjoys the greatest per sq ft sales of most retail malls when you look at the U.S., and the growth in retail sales within the city is significantly outpacing compared to gaming revenue. The presence of these shops serves as both an activity to your area's 35 million annual visitors, who will be now spending lower than 4 hours per day actually gaming, along with an important profit center that leverages the visitation base.

In less resort destination type markets, outlet malls are strong traffic generators from where a casino facility can draw patronage. On a smaller sized scale, casinos can widen their occasioned-use by providing unique and indigenous shopping this is certainly especially positioned to attract the "adjunctive" daytripper market. The extent and characteristics of those stores should really be scaled to the potential market, current visitation trends, and your regional ambiance.

Entertainment

Although entertainment is a mainstay in casino environments, stemming through the Rat Pack days in Las Vegas, to today's imposing concert/arena venues and specialty shows; their market dynamics are a lot misunderstood. They've been at the same time, diversions, attractions, profit centers, and public relation tools. They are able to however, also generate major losses, and as a consequence should always be well studied to determine their appropriate configuration.

With most top entertainment events occurring through the weekend periods the attracted audiences may not have any significant effect on a likely already busy period. So that it in incumbent that the specific event be structured to be able to at least break even or turn a little profit. While this is somewhat self evident, the greater central issue could be the entertainment venue's capacity to also amortize its initial development cost investment. Outdoor facilities can sharply reduce construction costs, but in addition are susceptible to weather vagaries and seasonal use. Moreover, party tents and temporary structures will not have the cache of a set venue that is a fundamental piece of the casino facility.

Recreational Facilities

There is lots of attention these days being provided to the development of recreational facilities at casino venues, especially those connected with resort projects. Golf courses are a typical adjunct to many resorts, and several Indian communities enjoy the advantage of having access to the ample land areas and water rights these kinds of undertakings require.

As with every of this other revenue enhancing reinvestment alternatives discussed herein, recreational facility development is highly recommended in the context of their power to generate additional casino patrons and/or serve as a revenue center. Whereas golfers traditionally have a higher gaming proclivity the association of golf with a casino is not exactly in sync, because of the length of time required for a typical round. Moreover, even under the highest utilization rates, an average 18 hole golf course is only going to accommodate about 140 players each day, even though the national average in year round environments is all about 100 rounds per day. This is simply not lots of additional players when it comes to casino, even though all of them gambled, and especially thinking about the cost of the average course, excluding land, ranging between $5M to $15M.

However, golf course development included in a resort package and/or to fill a nearby market demand can have many non-gaming related benefits. From a resort development standpoint, a golf course along with other recreational elements can truly add to the facility's competitive positioning, to the stage 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, that have an especially higher value than non-golf course sites. Given the trust status of Indian lands, this might be somewhat problematical on reservation lands, unless some type of long haul land leases could possibly be negotiated when it comes to home owners.
Planning/Financing & Implementation

Once all the salient market factors have been considered and weighted against their cost vs. benefits, a comprehensive reinvestment & expansion program will start to take shape. A design & construction team should always be assembled that will help further interpret the program with regards to creative and value engineering input, while also maintaining its established market positioning and financial strategies.

Importantly, this program should illustrate how each element will likely to be coordinated in to the overall facility fabric and also the manner in which it'll be financed. Some funding can stem from reserved profit allocations, while some independently funded with additional debt, whose amortization has been factored to the overall project's feasibility analysis.

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