Right Care & Feeding of your Golden Goose
Under the new paradigm of declining economic conditions across a broad spectrum of consumer spending, casinos face a unique challenge in addressing how 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, in addition for you to some growing trend in state imposed service fees.
Determining how much to “render unto Caesar,” while reserving the requisite funds to maintain market share, grow market penetration and improve profitability, is a challenging task that should be well planned and executed.
It is via this context and the author’s perspective which includes time and grade hands-on experience planet development and treating these types of investments, that this brief article relates ways where you can plan and prioritize a casino reinvestment strategy.
Although it looks axiomatic not cooking the goose that lays the golden eggs, it is amazing how little thought is oft times given to the on-going proper care and feeding. Using the advent of a brand casino, developers/tribal councils, investors & financiers are rightfully anxious to reap the rewards and there’s a simple tendency not to allocate a sufficient amount of the earnings towards asset maintenance & enhancement. Thereby begging the question of just what amount of the profits should be allocated to reinvestment, and towards what goals.
Inasmuch as each project has an particular set of circumstances, there aren’t an hard and fast rules. For one of the most part, many from the major commercial casino operators do not distribute net profits as dividends to the stockholders, but rather reinvest them in improvements to their existing venues while also seeking new buildings. Some of these programs are also funded through additional debt instruments and/or equity stock articles. The lowered tax rates on corporate dividends will likely shift the emphasis of these financing methods, while still maintaining the core business prudence of on-going reinvestment.
As a group, and prior to the economic conditions, the publicly held companies had a net income ratio (earnings before income taxes & depreciation) that averages 25% of income after deduction among the gross revenue taxes and interest costs. On average, almost two thirds for the remaining profits are being used for reinvestment and asset replacement.
Casino operations in low gross gaming tax rate jurisdictions are more readily able to reinvest in their properties, thereby further enhancing revenues that in the end benefit the tax base. New Jersey is a good example, as it mandates certain reinvestment allocations, as an income stimulant. Other states, such as Illinois and Indiana with higher effective rates, run the chance reducing reinvestment that may eventually erode the ability of the casinos to develop 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 critical element in determining its long-term viability, and should be an integral aspect of the initial development treatment. While short term loan amortization/debt prepayment programs may at first seem desirable you will find that quickly come rid of under the obligation, they can also sharply reduce the ability to reinvest/expand on a timely basis. This can often happen for any profit distribution, whether to investors or after consuming 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 that is seriously limit a certain project’s ability keep its competitiveness and/or meet available opportunities.
Whereas we aren’t advocating that all profits be plowed-back into the operation, we are encouraging the consideration a good allocation program that takes into account the “real” costs of maintaining the asset and maximizing its impact.
There are three essential areas of capital allocation that should be considered, as shown below and being a of priority.
1. Maintenance and Replacement
2. Cost Savings
3. Revenue Enhancement/Growth
The first two priorities are pretty simple to appreciate, in the they have a principal affect on maintaining market positioning and improving profitability, whereas, the third is nearly problematical in that it really has more associated with the indirect affect that needs an understanding on the market dynamics and greater investment health risk. All aspects that are herewith further discussed.
Maintenance & Replacement
Maintenance & Replacement provisions should thought to be regular function of the casino’s annual budget, which represents a fixed reserve based on the projected replacement costs of furniture, fixture, equipment, building, systems and landscaping. Too often however we percieve annual wish lists that bear no relationship for the actual wear & tear of these items. It is therefore important to actually schedule the replacement cycle, allocating funds which do not necessarily have to actually be incurred in of accrual. During a start-up period manors seem important for spend little money on replacing of brand new assets, however by accruing amounts to be reserved for his eventual recycling will avoid having to scurry for your funds when they are most needed.
One area of special consideration is slot machines, whose replacement cycle has been shortening of late, as newer games & technology is developing from a much higher rate, and as the competition dictates.
Investment on price savings programs & systems are, by their very nature and when adequately researched a less risky use of profit allocation funding then almost some other investment. These items can often take is very important of new energy saving systems, labor saving products, more efficient purchasing intermediation, and interest reductions.
These items have their caveats, any one of which through using thoroughly analyze their touted savings against your own particular application, as quite often the product claims are exaggerated. Lease buy-outs and long term debt prepayments can be advantageous, specifically the obligations were entered during growth stage when equity funds may tend to be limited. In these cases the important to look at this strategy’s net effect to your bottom line, in comparison with alternative uses for the monies for revenue enhancing/growth investments.
One recent trend is the growing rise in popularity of cash-less slot systems, which not only provide labor savings for fills, counts and hand-pays, but also serve as an aid to patrons who do not in order to lug around those cumbersome coin buckets, while also encouraging multiple game intake.
Revenue Enhancing & Growth
Leveraging may be the key catalyst of any revenue enhancing/growth related cost. It includes the following:
o Patronage Base
o Available Funds
o Marketing Clout
o Management Experience
The principal is to leverage the of choices asset towards achieving higher revenues & profitability. Typical examples include increasing average patronage base spending and widening the effective trading radius, by additional products/services, such as retail stores, entertainment alternatives, recreational/leisure amenities, overnight accommodations, more restaurant choices, in addition to course, expanded gaming.
Anticipation of potential growth and expansion should be fully built-into the project’s initial master planning because it helps it assure cohesive integration of the possible elements from a phased-in program, while also allowing for the least associated with operational dysfunction. Unfortunately, it’s not always possible to anticipate market changes, so expansion alternatives must be carefully taken into account.
The Main issue
Before starting any kind of expansion and/or enhancement program we recommend first stepping back and assessing the property’s present positioning relative to the market and competitive environment. Once we have featured in numerous gaming jurisdictions close to the country, often casino ventures that also been operating “fat and happy” for several years, feel the in a zero-growth year. Sometimes this is due to competition stemming from either/both new community casinos or regional venues that have the affect of reducing patronage from peripheral area areas. Additionally, the current subscriber base may get bored with their experience for that reason seeking greener pastures. The historical involving the Las vegas strip is testament on the success of continually “reinventing” oneself.
Our path to these market studies is initially preoccupied on determining felt to which your current facility is penetrating the potential market also relationship to any competitive market shares. Typically, this represents an research into the current patronage base in terms of of information gleaned from player tracking data base, and mailing lists, along with day-part, daily, weekly, monthly and seasonal revenue variations.
This data is then interfaced with an evaluation of the actual market potential to indicate the extent in which certain market segments are while using facility along with the needs will be fulfilling. Most of all however, often that this regarding analysis will indicate those market segments that are not utilizing the facility more fully, and why.
As our proprietary possess indicated, casino markets are segmented by various characteristics of occasioned-use that also include typical spending & visitation patterns. For recycling paper methods 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 more information as on the reasons precipitating a casino visit, where did they relate to the benefits being sought, along with the degree that the occasion determines average spending and visitation regularity. This type of data mining is far more helpful than gravity modeling, in the it might help determine kind of of facilities and positioning strategies vital for attract each market segment, by measuring their relative contribution towards aggregate . The process has been successfully in the the restaurant business along with leisure time service industries, especially amid a widening supply/demand bazaar.
Perhaps even more importantly, thinking of the market from an occasioned-use perspective, reveals the extent and characteristics for this underling competition, that, in lot of cases not necessarily include other casinos, but alternative entertainment and freedom activities, since restaurants, clubs, theaters, and also the like.
Another important aspect of occasion segmentation is set in measuring overall market characteristics by day-parts, which is revenue density by time of day, day per week, weekly, monthly, and seasonally. This is principally important data when casino venues are searhing for to lessen any higher than normal fluctuations that might be occurring coming from a slow Monday morning and also a packed Saturday night; or that experience severe seasonal variations.
By segmenting markets by their demand patterns, a great understanding can be gained of which amenities may help bolster the weak demand periods, but they are still that can add on the already maximized peaks.
Many expansion programs often make blunder of configuring additional amenities such as high-end restaurants and lodging elements in line with the peak demand periods. As a result, the net effect of costs & expenses on account of investments can negate any contribution informative make to increased gaming revenues. Rather, “fill-in” markets are the most effective means to increase overall revenues, as they utilize existing capacities. Nevada has achieved great success in creating strong mid-week activity through promotion of your extensive conference/convention facilities.
Amenity Driven Markets
Another benefit from utilizing occasion-segmentation is its capability to also indicate the potential impact certain amenities placed on “impelling” visitation. While gravity models examine the casino related spending characteristics in the place of given market area, the formulas cannot measure the relative impact of any non-gaming driven activities which could nonetheless generate casino website vistors.
Important data relating towards the population’s occasioned-use of restaurant, entertainment, and weekend getaways can often form the cornerstone on which to focus amenities made to cater in order to those markets; in fact so doing, increase visitation. Whereas many of these patrons might not make use of the casino, their exposure towards opportunity may hasten their use, whilst creating an additional profit revolve.
Again, seeking to the Las vegas paradigm, as well as more more of this strip properties are now generating as much, if not 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 on the bottom bond.
Once equipped with a basic understanding in the market dynamics, both easy the existing facility’s home market shares/penetration rates in relationship to the competitive mix, and in overall occasioned-use belonging to the market, a matrix can be created that sets require against the provision. This function seeks to identify areas of un-met demand opportunities and/or over supply, that forms the spring-board to the roll-out of relevant amenities, expansion and upgrade criteria & plans.
Essentially there are two involving expansion/upgrade strategies: subsidized and profit-centers. Subsidized elements include adding and/or improving amenities that will further widen current gaming market penetration/shares, thusly having a direct affect growing casino revenues; while profit centers are designed to further leverage current patronage patterns with additional spending opportunities, and which has an in-direct relation to gaming physical exercise. Although many of the actual greater traditional amenities, such as restaurants, hotels, retail shops, entertainment venues and recreational facilities can fall into one or both of these categories, its important things the distinction, so related to clearly establish the design/development criteria.
As may be previously discussed, Las Vegas continually seeks to reinvent itself like a means to increase repeat visitation, that by itself creates a snowballing affect as each venue must keep-up having its neighbor. To some extent upgrading programs, might be include creating a new and fresher look, is a large number like protection policy against slipping revenues, and don’t necessarily refer to any incremental growth per se. Not to be mistaken for replacement programs of worn carpeting and slot machine recycling, upgrading program should seek in order to 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,” as reported by a thorough understanding 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 ways in which often. High per position per day net win averages aren’t always a sign of a prospering casino, as they can also mean lost opportunity because of insufficient connected with games. Conversely, additional positions are never going produce the same averages.
When initially configuring capacities for whole new facility, it is really important to fully evaluate require patterns his or her respective day-part components that can maximize penetration during several periods while minimizing inefficiency – the attachment site where the costs 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 have the ability to both widen occasioned-use of the casino, while also representing potential profit treatment centers.
In Nevada, which may be the only state where detailed historical F&B departmental operating results found for casinos, properties with gaming revenues averaging between $20M to $200M showed food operations having a web departmental loss in 1.5% of sales in 2001, versus almost a 14% reduction in 1995.
Much of these major turnaround is simply because of the growth in the associated with 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 been reduced sharply from 45% in 1995 to 35% in ’01.
As preceding discussion on occasion-segmentation revealed, a consumer’s choice of some casino visit can sometimes compete with other entertainment/leisure time activities, including dining out. Having a market relevant restaurant facility within the casino can serve entice the dining-out destination market, with the casino making use of its nearness. Therefore when market conditions indicate a change in a casino’s restaurant configuration, the inquiries to be addressed are how can they be designed to meet the current patronage base, widen occasioned-use, and improve profitability.
With turnkey hotel development costs ranging between $75K to $350K per available room, an industry positioning strategy had had better be well been trained in. Yet we see many such projects undertaken with little regarding the market dynamics and economic effect on.
Nationwide, according to our current survey, are usually many 724 casinos around the country; consists of 442 commercial operations, about 50 % 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) discs. Roundly 58% of casinos in the commercial gaming sector have co-located hotels, likened to 37% of sophistication III Indian gaming venues, despite their containing previous legislation average quantity of games.
The high preponderance of hotels within the commercial sector owes to some gaming jurisdictions requiring them; including Nevada (for an unrestricted license) and On the internet services. Moreover, much belonging to the Nevada market demand is due to beyond a daytrip radius, making overnight accommodations necessary in order to gain market publish. When extrapolating these states from the total, the percentage of all commercial casinos with hotels drops to 50%, with an average of 312 rooms & 1,183 games.
The obvious advantages of casino lodging units is their ability to draw gaming markets from after dark typical saturday radius, while also having a somewhat “captured” market (Casinos with Hotels). Moreover, guest rooms could be another perk-use for player club locations. Hotels also widen a casino’s occasioned-use by offering non-gaming leisure activities & amenities, augmented by the ready accessibility to gaming, while representing another profit center (Hotels with Casinos). Additionally, within an old-fashioned lodging setting, a casino/hotel has an aggressive advantage because of its added entertainment features.
Among significant Las Vegas properties strategies more resort rooms than games, as area transits in a gaming location to more of a resort & convention dreamland. In so doing these properties increased their hotel profitability and investment returns by possessing to offer low rates to attract gamers. Whereas, some areas such as Laughlin and Reno, that do not effectively enjoy the critical mass of a Las Vegas, still discover it necessary to supplement their hotel investment with casino revenue, a consequence of low room rates and larger seasonal visitation fluctuations
In configuring a casino hotel development it is therefore important to be aware the market and financial dynamics together with their impact on overall gaming revenue and profits. Although free-standing (non-casino) hotel industry, financing terms are usually over a 15 to 20 year amortization schedule having a ten year balloon/refinance, and indulge in a break even point that approaches 65% to 70% occupancy. Typical casino based lodging elements enjoy high occupancy levels across the weekends, but low levels weekday. It’s not therefore incumbent not to “build a church for Easter Sunday,” keeping at the overall efficient regarding the residence.
Moreover, in case the intent is always to attract additional casino patronage from a wider market radius, it’s critical to measure the cost any kind of hotel subsidy versus the potential increase in gaming proceeds. A new 200 room hotel at a casino already generating 20,000 weekend visitors, may only be adding 2% to 4% more players, while exposing itself to increase costs. With reference to occasioned-use, especially among tourists and weekenders, casino hotels furthermore be rivaling alternative resorts in the neighborhood.
Ideally, these kinds of of facilities, when not situated in markets with insufficient local/day-trip markets (e.g. Laughlin), in order to configured because of their non-gaming related and off-peak period support so of maintain relevant room rates and adequate levels of profitability. Extremely automatic also include those amenities these markets are seeking, including, where applicable: conference and convention facilities, and indoor/outdoor recreational outside conditions.
Albeit more of a niche market, RV Park facilities are a less intensive investment in overnight lodging facilities that can nonetheless offer some of the same rewards. According to the latest data, there are more than 9 million households inside United States that own RVs, and represent undoubtedly every ten vehicle owning households. Lots these households include the 55 & over age groups, who’ve a higher than average gaming propensity and annual benefit.
RV Park development costs are well below those for hotels, in fact have a larger seasonal use, peaking within summer months in temperate resort environs and in the wintertime months in the “snowbird” sectors.
Retail/Outlet shopping is gaining a major foothold at casino venues across the state. First represented by casino logo shops along with 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 in Las Vegas enjoys superior per sq . ft . sales just about all retail malls in the U.S., as well as the growth in retail sales in metropolis is significantly outpacing that gaming return. The presence of these shops serves as both an activity to the area’s 35 million annual visitors, in which now conserving money than 4 hours on a daily basis actually gaming, as well as a key 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 the smaller scale, casinos can widen their occasioned-use supplying unique and indigenous shopping that is extremely positioned to draw the “adjunctive” daytripper promot. The extent and characteristics of these stores in order to be scaled to the potential market, current visitation trends, and then for any local ambience.
Although entertainment is a mainstay in casino environments, stemming coming from a Rat Pack days in Las Vegas, to today’s imposing concert/arena venues and specialty shows; their market dynamics are much misunderstood. They at once, diversions, attractions, profit centers, and public relation methods. They can however, also generate major losses, and for that reason should be studied ascertain their appropriate configuration.
With most major entertainment events occurring during the weekend periods the attracted audiences nicely have any significant effect a likely already busy period. It in incumbent that must be event be structured so as to at least break even or turn a small profit. While this is somewhat self evident, the more central issue is the entertainment venue’s capacity 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 commonly do not have the cache in the place of fixed venue that can be an integral a part of the casino facility.
There is a lot of attention these days being fond of the growth and development of recreational facilities at casino venues, specifically those associated with resort endeavours. Golf courses are called soft skills adjunct to many resorts, and often those Indian communities enjoy the bonus of getting access to the ample land areas and water rights fertilizer of undertakings require.
As system the other revenue enhancing reinvestment alternatives discussed herein, recreational facility development in order to be considered inside the context of their ability produce additional casino patrons and/or serve being a profit midsection. Whereas golfers traditionally have a high gaming proclivity the association of golf by using a casino isn’t exactly in sync, within the length of energy and time required for a typical set. Moreover, even under the greatest 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 all about 100 rounds per week. This is not a large number of additional players for your casino, regardless if all of parents gambled, as well as considering the cost of an average course, excluding land, ranging between $5M to $15M.
However, greens development as part of a resort package and/or to fill an area market demand can have many non-gaming related benefits. In the resort development standpoint, a golf course as well as other recreational elements can combine with the facility’s competitive positioning, to the attachment site 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 portals. Given the trust status of Indian lands, may be somewhat problematical on reservation lands, unless some kind of continued land leases could be negotiated for that home owners.
Planning/Financing & Implementation
Once all of the salient market factors have been considered and weighted against their cost vs. benefits, a comprehensive reinvestment & expansion program can for you to take appearance. A design & construction team in order to assembled actually help further interpret the possibility in terms of creative and value engineering input, as well as maintaining its established market positioning and financial methods for.
Importantly, the program offers you should illustrate how each element possibly be coordinated in the overall facility fabric and the manner by it always be financed. Some funding can stem from reserved profit allocations, while others independently funded with additional debt, whose amortization been recently factored in the overall project’s feasibility evaluation.
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