Casino Reinvestment And Expansion

The Proper Care & Feeding of the Golden Goose

Under the new paradigm of declining economic conditions across a diverse spectrum of consumer spending, casinos face a unique challenge in addressing the way they both maintain profitability while also remaining competitive. These factors are further complicated within 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 increasing trend in state imposed fees.

Determining exactly how much to "render unto Caesar," while reserving the requisite funds to maintain share of the market, grow market penetration and improve profitability, is a disheartening task that really must be well planned and executed.

It really is through this context and also the author's perspective which includes time and grade hands-on expertise in the development and management of these types of investments, that this informative article relates ways in which to plan and prioritize a gambling establishment reinvestment strategy.

Cooked Goose

Though it appears to be axiomatic to not cook the goose that lays the golden eggs, it is amazing how little thought is oft times provided to its on-going good care and feeding. Utilizing the advent of a unique casino, developers/tribal councils, investors & financiers are rightfully anxious to reap the rewards and there's a tendency never to allocate a sufficient amount of the gains towards asset maintenance & enhancement. Thereby begging the question of simply how much associated with the profits should be allotted to reinvestment, and towards what goals.

Inasmuch as each project has its own particular collection of circumstances, there aren't any cast in stone rules. Generally speaking, lots of the major commercial casino operators usually do not distribute net profits as dividends for their stockholders, but rather reinvest them in improvements with their existing venues while also seeking new locations. Many of these programs are also funded through additional debt instruments and/or equity stock offerings. The lowered tax rates on corporate dividends will most likely shift the emphasis of those financing methods, while still maintaining the core business prudence of on-going reinvestment.
Profit Allocation

As an organization, and ahead of 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 the gross revenue taxes and interest payments. On average, almost two thirds associated with the remaining profits can be used for reinvestment and asset replacement.

Casino operations in low gross gaming tax rate jurisdictions are far more readily able to reinvest within their properties, thereby further enhancing revenues that will eventually benefit the tax base. Nj-new jersey is a good example, since 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 that could eventually erode the ability associated with 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 gambling establishment 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 at first seem desirable so as to quickly turn out from under the obligation, they can also sharply decrease the capacity to reinvest/expand on a timely basis. This is especially true for any profit distribution, whether to investors or perhaps in the way it is of Indian gaming projects, distributions to a tribe's general fund for infrastructure/per capita payments.

Moreover, many lenders make the error of requiring excessive debt service reserves and place restrictions on reinvestment or further leverage that may seriously limit a given project's capacity to manage its competitiveness and/or meet available opportunities.

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

Establishing Priorities

There are three essential regions of capital allocation which should be considered, as shown below as well as in order of priority.

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

The first two priorities are easy enough to appreciate, for the reason that they usually have a primary affect on maintaining market positioning and improving profitability, whereas, the third is somewhat problematical for the reason that it has more of an indirect affect that requires an understanding for the market dynamics and greater investment risk. All aspects which can be herewith further discussed.

Maintenance & Replacement

Maintenance & Replacement provisions must certanly be a normal function of the casino's annual budget, which represents a set reserve on the basis of the projected replacement costs of furniture, fixture, equipment, building, systems and landscaping. Many times however we come across annual wish lists that bear no relationship to the actual wear & tear of those items. It is therefore crucial that you actually schedule the replacement cycle, allocating funds that do not necessarily need certainly to actually be incurred when you look at the year of accrual. During a start-up period may possibly not seem necessary to spend hardly any money on replacement of brand new assets, however by accruing amounts to be reserved with regards to their eventual recycling will avoid needing to scurry when it comes to funds when they're most needed.

One area of special consideration is slot machines, whose replacement cycle has been shortening of late, as newer games & technologies are developing at a much higher rate, and also as your competition dictates.

Cost Savings

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

These items have their caveats, certainly one of which is to thoroughly analyze their touted savings against your personal particular application, as much times the merchandise claims are exaggerated. Lease buy-outs and long term debt prepayments can be advantageous, particularly when the obligations were entered into during the development stage when equity funds may have been limited. In these instances you will need to look at this strategy's net influence 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 merely provide labor savings for fills, counts and hand-pays, but also serve as an aid to patrons that do not like to lug around those cumbersome coin buckets, while also encouraging multiple game usage.
Revenue Enhancing & Growth

Leveraging is the key catalyst of any 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 key would be to leverage making use of the available asset towards achieving higher revenues & profitability. Typical these include increasing average patronage base spending and widening the effective trading radius, by providing additional products/services, such as retail stores, entertainment alternatives, recreational/leisure amenities, overnight accommodations, more restaurant choices, and undoubtedly, expanded gaming.

Master Planning

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

The Big Picture

Before embarking on any type of expansion and/or enhancement program we highly recommend first stepping back and assessing the house's present positioning in accordance with the market and competitive environment. Even as we have observed in several gaming jurisdictions round the country, often casino ventures which were operating "fat and happy" for a few years, end up in a zero-growth period. Sometimes that is because of competition stemming from either/both new local area casinos or regional venues which have the affect of reducing patronage from peripheral area markets. Additionally, the present client base could become bored with their experience and therefore are seeking greener pastures. The historical growth of the Las vegas, nevada strip is testament to your popularity of continually "reinventing" oneself.

Our way of these market studies is initially dedicated to determining the amount to which the current facility is penetrating the possibility market plus in relationship to your 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 mailing lists, along with day-part, daily, weekly, monthly and seasonal revenue trends.

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

Occasion Segmentation

As our proprietary research reports have indicated, casino markets are segmented by various characteristics of occasioned-use that also include typical spending & visitation patterns. The standard ways of market measurements, including gravity models, usually only weigh the demographic characteristics of a given population, predicated on revenues achieved in similar markets. However, a celebration segmentation market analysis reveals more descriptive information as to the reasons precipitating a gambling establishment visit, the way they relate solely to the huge benefits being sought, together with degree to which the occasion determines average spending and visitation frequency. This type of data mining is much more helpful than gravity modeling, for the reason that it can benefit determine the type of facilities and positioning strategies required to attract each market segment, by measuring their relative contribution into the aggregate potential. The process happens to be successfully utilized in the restaurant business along with other free time service industries, especially amid a widening supply/demand marketplace.

Perhaps 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 in addition alternative entertainment and leisure time activities, such as restaurants, clubs, theaters, and so on.

Demand Density

Another essential facet of occasion segmentation is within measuring overall market characteristics by day-parts, which will be revenue density by time of day, day per week, weekly, monthly, and seasonally. This is certainly especially important data when casino venues would like to minimize any higher than normal fluctuations which may 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 far better understanding may be gained of which amenities may help strengthen the weak demand periods, and the ones that may only enhance the already maximized peaks.

Many expansion programs often make the error of configuring additional amenities such as high-end restaurants and lodging elements on the basis of the peak demand periods. Because of this, the net effect of costs & expenses of these investments can negate any contribution they may make to increased gaming revenues. Rather, "fill-in" markets would be the most efficient 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 their 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 any non-gaming driven activities that may nonetheless generate casino traffic.

Important data regarding the population's occasioned-use of restaurant, entertainment, and weekend getaways can often form the cornerstone by which to target amenities made to cater to these markets; and also by so doing, increase visitation. Whereas a number of these patrons may or may not utilize the casino, their contact with the chance may hasten their use, while also creating yet another profit center.

Again, looking to the Las vegas, nevada paradigm, more and more of the strip properties are now generating just as much, if you don't more, non-gaming revenues than gaming revenues; as their hotels and restaurants are less & less subsidized, and along with their growing retail elements, represent strong contributors to your bottom line.

Program Development

Once equipped with a simple understanding of the marketplace dynamics, both in terms of the prevailing facility's current market shares/penetration rates in relationship into the competitive mix, additionally the overall occasioned-use associated with market, a matrix can be created that sets the demand from the supply. This function seeks to identify aspects of un-met demand opportunities and/or over supply, that forms the spring-board into the creation of relevant amenities, expansion and upgrade criteria & strategies.

Impact Criteria

Essentially there's two forms of expansion/upgrade strategies: subsidized and profit-centers. Subsidized elements can include adding and/or improving amenities which will further widen current gaming market penetration/shares, thusly having a primary impact on growing casino revenues; while profit centers are created to further leverage current patronage patterns with additional spending opportunities, and having an in-direct influence on gaming activity. Although some of the more conventional amenities, such as for example restaurants, hotels, retail shops, entertainment venues and recreational facilities can get into one or both of these categories, its important to help make the distinction, so as to clearly establish the design/development criteria.

Upgrading/Expansion

As happens to be previously discussed, Las vegas, nevada continually seeks to reinvent itself as a way to improve repeat visitation, that in itself creates a snowballing affect as each venue must keep-up using its neighbor. To some degree upgrading programs, which will include creating a fresh and fresher look, is a lot like insurance coverage against slipping revenues, plus don't necessarily relate to any incremental growth by itself. Not to be mistaken for replacement programs of worn carpeting and slot machine game recycling, an upgrade program should seek to generate new excitement about the facility in terms of ambiance, quality of finishes, layouts, and overall décor.

Expansion of existing capacity is less a function of market analysis and much more a function of "making hay although the sun shines," predicated on a comprehensive knowledge of the visitation pattern densities. Patron back-ups for gaming positions and restaurant tables may be both negative and positive, depending on if they occur and exactly how often. High per position a day net win averages are not always an indication of a prospering casino, as they could also mean lost opportunity as a result of an insufficient amount of games. Conversely, additional positions are not necessarily going to generate the exact same averages.

When initially configuring capacities for a new facility, you should fully measure the demand patterns into their respective day-part components which will maximize penetration throughout the peak periods while minimizing inefficiency - the stage where the expense related to additional capacity is exceeded by its net gain 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 have the ability to both widen occasioned-use of this casino, while also representing potential profit centers.

In Nevada, which can be the actual only real state where detailed historical F&B departmental operating results are offered 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.

Most of this major turnaround is a result of the development into the amount of food outlets, especially more upscale/specialty restaurants, that has spurred sales from 20% of gaming revenue in 1995 to almost 27% in 2001. Moreover, food costs have now been reduced sharply from 45% in 1995 to 35% in '01.

Given that previous discussion on occasion-segmentation revealed, a consumer's choice 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, with all the casino taking advantage of its proximity. Therefore when market conditions indicate changes in a gambling establishment'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, an industry positioning strategy need to be well studied. Yet we see many such projects undertaken with little knowledge of the market dynamics and economic impact.

Nationwide, in accordance with our most recent survey, you can find 724 casinos around the country; made up of 442 commercial operations, approximately half of which are situated in Nevada, and 282 Indian gaming venues, of which 209 offer most, if not all, of Las vegas, nevada type (Class III) games. 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 an identical average number 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 New Jersey. Moreover, most of the Nevada market demand comes from beyond a daytrip radius, making overnight accommodations necessary to be able to gain share of the market. When extrapolating these states through the total, the percentage of all of the commercial casinos with hotels drops to 50%, with on average 312 rooms & 1,183 games.

The most obvious features of casino lodging units is the power to attract gaming markets from beyond the typical day trip radius, while also having a somewhat "captured" market (Casinos with Hotels). Moreover, guest rooms can 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 availability of gaming, while also representing another profit center (Hotels with Casinos). Additionally, within a conventional lodging setting, a casino/hotel has an aggressive advantage by virtue of the added entertainment features.

On the list of major Las Vegas properties there are many rooms in hotels than games, because 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 not having to provide low rates to attract gamers. Whereas, some areas such as for instance Laughlin and Reno, that do not benefit from the critical mass of a Las Vegas, still think it is essential to supplement their hotel investment with casino revenue, because of low room rates and enormous seasonal visitation fluctuations

In configuring a casino hotel development it is therefore important to understand the market and financial dynamics and their effect 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 have some slack even point that approaches 65% to 70% occupancy. Typical casino based lodging elements enjoy high occupancy levels on the weekends, but lower levels weekday. It is incumbent to not "build a church for Easter Sunday," keeping in your mind the overall efficient utilization of the asset.

Moreover, in the event that intent will be attract additional casino patronage from a wider market radius, it is vital to assess the cost of any hotel subsidy versus the potential rise in gaming profits. An innovative new 200 room hotel at a gambling establishment already generating 20,000 weekend visitors, might only be adding 2% to 4% more players, while exposing itself to raised costs. In regards to occasioned-use, especially among tourists and weekenders, casino hotels are often competing with alternative resorts in the area.

Ideally, these kinds of facilities, you should definitely positioned in markets with insufficient local/day-trip markets (e.g. Laughlin), must be configured on the basis of their non-gaming related and off-peak period support so as to maintain relevant room rates and adequate degrees of profitability. They should also include those amenities these markets are seeking, 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 may nonetheless offer some of the same benefits. Based on the latest data, there are more 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 groups, who have an increased than average gaming propensity and annual income.

RV Park development prices are well below those for hotels, but often have a high seasonal use, peaking during the summer months in temperate resort environs and in the winter months into the "snowbird" areas.

Retail/Outlet Shops

Retail/Outlet shopping is gaining a significant foothold at casino venues across the country. 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 best per sq ft sales of all of the retail malls in the U.S., and the development in retail sales within the city is significantly outpacing compared to gaming revenue. The existence of these shops serves as both an action towards the area's 35 million annual visitors, who will be now spending significantly less than 4 hours a day actually gaming, as well as a major profit center that leverages the visitation base.

In less resort destination type markets, outlet malls are strong traffic generators from which a gambling establishment facility can draw patronage. On a smaller sized scale, casinos can widen their occasioned-use by offering unique and indigenous shopping this is certainly especially positioned to attract the "adjunctive" daytripper market. The extent and characteristics among these stores should always be scaled to the potential market, current visitation trends, and any local ambiance.

Entertainment

Although entertainment is a mainstay in casino environments, stemming through the Rat Pack days in Las vegas, nevada, to today's imposing concert/arena venues and specialty shows; their market dynamics are much misunderstood. They are at once, diversions, attractions, profit centers, and public relation tools. They could however, also generate major losses, and for that reason should always be well studied to find out their appropriate configuration.

With most top entertainment events occurring throughout the weekend periods the attracted audiences might not have any significant effect on a likely already busy period. Therefore it in incumbent that the precise event be structured to be able to at the very least break even or turn a little profit. While this is somewhat self evident, the greater central issue may be 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 usually do not have the cache of a set venue that is an integral part of the casino facility.

Recreational Facilities

There is a lot of attention these days being directed at the development of recreational facilities at casino venues, especially those connected with resort projects. Golf courses are a typical adjunct to numerous resorts, and several Indian communities take pleasure in the benefit of having access to the ample land areas and water rights these kinds of undertakings require.

As with all for the other revenue enhancing reinvestment alternatives discussed herein, recreational facility development is highly recommended inside the context of its power to generate additional casino patrons and/or act as a profit center. Whereas golfers traditionally have a higher gaming proclivity the association of golf with a gambling establishment is certainly not exactly in sync, because of the amount of time necessary for an average round. Moreover, even under the highest utilization rates, a normal 18 hole golf course will only accommodate about 140 players a day, whilst the national average in year round environments is approximately 100 rounds a day. It is not plenty of additional players when it comes to casino, even in the event all of them gambled, and particularly thinking about the price of the average course, excluding land, ranging between $5M to $15M.

However, golf course development as an element of a resort package and/or to fill an area market demand might have many non-gaming related benefits. From a resort development standpoint, a golf course along with other recreational elements can add on towards the facility's competitive positioning, to the point where its development/operating costs may be recaptured through higher room rates/green fees. Many traditional golf courses also "pencil-out" when incorporating fairway home sites, which have an especially higher value than non-golf course sites. Because of the trust status of Indian lands, this may be somewhat problematical on reservation lands, unless some sort of long term land leases might be negotiated when it comes to property owners.
Planning/Financing & Implementation

Once all of the salient market factors have already been considered and weighted against their cost vs. benefits, a comprehensive reinvestment & expansion program can begin to take shape. A design & construction team must certanly be assembled which will help further interpret the program when it comes to creative and value engineering input, while also maintaining its established market positioning and financial strategies.

Importantly, this program should illustrate how each element would be coordinated into the overall facility fabric therefore the manner for which it will be financed. Some funding can stem from reserved profit allocations, while others independently funded with additional debt, whose amortization happens to be factored to the overall project's feasibility analysis.

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