Casino Reinvestment And Expansion

The proper Care & Feeding within the Golden Goose

Under brand 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 remaining extreme. 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, and also a growing trend in state imposed payments.

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

It is this context and the author's perspective that includes time and grade hands-on experience in the development and management of these types of investments, this article relates ways in which to plan and prioritize a casino reinvestment regimen.

Cooked Goose

Although it would seem 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 adding. With the advent of a new casino, developers/tribal councils, investors & financiers are rightfully anxious to reap the rewards and there's a tendency not to allocate an adequate amount of the profits towards asset maintenance & enhancement. Thereby begging practical question of the level of of the profits 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 solutions. For the most part, many for the major commercial casino operators do not distribute net profits as dividends to their stockholders, instead 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 financing methods, while still maintaining each video business prudence of on-going reinvestment.
Profit Allocation

As a group, and prior to the 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 belonging to the remaining earnings are utilized for reinvestment and asset new.

Casino operations in low gross gaming tax rate jurisdictions a lot more readily able to reinvest of their properties, thereby further enhancing revenues is going to also eventually profit the tax trust. 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 risk of reducing reinvestment that may eventually erode the ability of the casinos to grow market demand penetrations, especially as neighboring states be competitive. Moreover, effective management can generate higher available profit for reinvestment, stemming from both efficient operations and favorable borrowing & equity offerings.

How an internet casino enterprise decides to allocate its casino profits is a critical element in determining its long-term viability, and must be an integral aspect from the initial development strategy. While short term loan amortization/debt prepayment programs may in the beginning seem desirable so as to quickly leave from your obligation, they can also sharply reduce to enable you to reinvest/expand on a timely reason. This is also true for any profit distribution, whether to investors or in the case of Indian gaming projects, distributions to a tribe's general fund for infrastructure/per capita payments.

Moreover, most financiers make the error of requiring excessive debt service reserves and place restrictions on reinvestment or further leverage which can seriously limit a given project's opportunity 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 of an allocation program that considers the "real" costs of maintaining the asset and maximizing its impact.

Establishing Priorities

There are three essential areas of capital allocation that end up being considered, as shown below and in order of priority.

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

The first 2 priorities are simple enough to appreciate, given that 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 idea of the market dynamics and greater investment risk. All aspects that are herewith further discussed.

Maintenance & Replacement

Maintenance & Replacement provisions should be a 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 see annual wish lists that bear no relationship towards the actual wear & tear of these products. It is therefore important really schedule the replacement cycle, allocating funds that do not necessarily need to actually be incurred the actual year of accrual. Throughout a start-up period it may well not seem essential to spend money on replacing brand new assets, however by accruing amounts in order to reserved her or 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 & technologies are developing that has a much higher rate, which as the competition dictates.

Cost Savings

Investment in cost savings programs & systems are, by their very nature and if adequately researched a less risky associated with profit allocation funding then almost additional investment. This stuff 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, details is to thoroughly analyze their touted savings against your own particular application, as often times the product claims are exaggerated. Lease buy-outs and long term debt prepayments can often be advantageous, specifically the obligations were entered into during growth stage when equity funds may have been limited. An entire cases it is important to from this strategy's net effect on the bottom line, on the flip side with alternative uses of your monies for revenue enhancing/growth investments.

One recent trend may be 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 that not prefer to lug around those cumbersome coin buckets, while also encouraging multiple game employment.
Revenue Enhancing & Growth

Leveraging could be the key catalyst of any revenue enhancing/growth related investment. It includes the following:

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

The principal is to leverage the use of choices 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 built into the project's initial master planning if you wish it assure cohesive integration of the possible elements in a phased-in program, while also allowing for that least volume of operational interruption. Unfortunately, it's not always possible can be expected market changes, so expansion alternatives should be carefully considered.

The Main issue

Before starting any involving expansion and/or enhancement program we strongly recommend first stepping back and assessing the property's present positioning in accordance with the market and competitive environment. As we have observed in numerous gaming jurisdictions from the country, often casino ventures that already been operating "fat and happy" for a few years, find themselves in a zero-growth duration. Sometimes this is owing to competition stemming from either/both new geographic area casinos or regional venues that let the affect of reducing patronage from peripheral area markets. Additionally, the current client base may become bored with their experience therefore seeking greener pastures. The historical connected with the Las vegas strip is testament to the success of continually "reinventing" oneself.

Our process for these market studies is initially dedicated to determining the degree to the fact that current facility is penetrating the potential market or in relationship to any competitive market shares. Typically, this represents an analysis of the current patronage base when it comes to of information gleaned from player tracking data base, and mailing lists, coupled with day-part, daily, weekly, monthly and seasonal revenue trends.

This data is then interfaced with an exam of total market potential to indicate the extent this agreement certain market segments are making use of the facility as well as the needs is actually always fulfilling. More excitingly however, reality this type of analysis will indicate those market segments that are not utilizing the facility more fully, and why.

Occasion Segmentation

As our proprietary possess indicated, casino markets are segmented by various characteristics of occasioned-use that contain typical spending & visitation patterns. Classic methods of market measurements, including gravity models, usually only weigh the demographic characteristics of the 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, the direction they relate on the benefits being sought, and the degree to which the occasion determines average spending and visitation consistency. This type of data mining is far more helpful than gravity modeling, as it guide determine the type of facilities and positioning strategies necessary to attract each market segment, by measuring their relative contribution for the aggregate long run. The process has been successfully used in the restaurant business and other leisure time service industries, especially amid a widening supply/demand marketplace.

Perhaps no fax loans importantly, looking at the market from an occasioned-use perspective, reveals the extent and characteristics among the underling competition, that, to all cases merely include other casinos, likewise alternative entertainment and enjoyment activities, pertaining to instance restaurants, clubs, theaters, and stuff like that.

Demand Density

Another essential requirement of occasion segmentation is with measuring overall market characteristics by day-parts, which is revenue density by time of day, day per week, weekly, monthly, and seasonally. This is especially important data when casino venues are searching for to lessen any higher than normal fluctuations that may be occurring between a slow Monday morning and also packed Saturday night; or that experience severe seasonal variations.

By segmenting markets by their demand patterns, an easier understanding can be gained of which amenities may also help bolster the weak demand periods, and people that may only add for the already maximized peaks.

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

Amenity Driven Markets

Another benefit from utilizing occasion-segmentation is its ability to also indicate the potential impact certain amenities enhance "impelling" socializing. 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 cornerstone on which to focus amenities in order to cater to the people markets; through so doing, increase socializing. Whereas many of these patrons may or may not utilize the casino, their exposure for the opportunity may hasten their use, as well as creating method to profit cardiovascular.

Again, seeking to the Las vegas paradigm, as well as more for the 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 within their growing retail elements, represent strong contributors towards the bottom place.

Program Development

Once along 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 functioning occasioned-use of the market, a matrix could be created that sets the demand 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 & strategies.

Impact Criteria

Essentially couple of different methods two kinds of expansion/upgrade strategies: subsidized and profit-centers. Subsidized elements contain adding and/or improving amenities that will further widen current gaming market penetration/shares, thusly developing a direct relation to growing casino revenues; while profit centers are designed to further leverage current patronage patterns with additional spending opportunities, and having an in-direct affect gaming traffic. Although many of the 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 produce the distinction, so as to clearly establish the design/development criteria.

Upgrading/Expansion

As has 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 somewhat of an extent upgrading programs, that may include developing a new and fresher look, is a lot like an strategy against slipping revenues, and do not necessarily refer to any incremental growth per se. Not to be mistaken for replacement programs of worn carpeting and video slot recycling, an upgrade program should seek goes new excitement about the facility in relation to its ambiance, quality of finishes, layouts, and overall décor.

Expansion of existing capacity is less a purpose of market analysis and more a function of "making hay while the sun shines," with different 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 how often. High per position per day net win averages are not always an indication of a prospering casino, simply because could also mean lost opportunity any an insufficient number of games. Conversely, additional positions are not invariably going to generate the same averages.

When initially configuring capacities for the most up-tp-date facility, what is important to fully evaluate the demand patterns his or her respective day-part components that will maximize penetration during numerous periods while minimizing inefficiency - 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," in order to retain & attract casino patrons with low prices and great value; yet they come across to both widen occasioned-use of the casino, while also representing potential profit centers.

In Nevada, which is 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 working with a net departmental loss of merely one.5% of sales in 2001, versus almost a 14% loss in 1995.

Much of these major turnaround is because of the growth the actual world 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 any casino visit can sometimes compete to entertainment/leisure time activities, including dining out. Having a market relevant restaurant facility within the casino can serve to attract the dining-out destination market, with the casino enjoying its vicinity. Therefore when market conditions indicate changes within a casino's restaurant configuration, the questions to be addressed are how are they going to be in order to satisfy the present 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 had better be well studied. Yet we see many such projects undertaken with little understanding in the market dynamics and economic impact.

Nationwide, primarily based on our newest survey, your current 724 casinos around the country; consisted of 442 commercial operations, about half of that 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, in contrast to 37% of class III Indian gaming venues, despite their containing previous legislation average number of games.

The high preponderance of hotels within the commercial sector owes onto a gaming jurisdictions requiring them; including Nevada (for an unrestricted license) and On the internet services. Moreover, much of the Nevada market demand comes from beyond a daytrip radius, making overnight accommodations necessary in order to gain market quickly share. When extrapolating these states of 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 appeal to gaming markets from beyond the typical excursion 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 through non-gaming leisure activities & amenities, augmented by the ready availability of gaming, as well as representing another profit center (Hotels with Casinos). Additionally, within a conventional lodging setting, a casino/hotel has a competitive advantage by virtue of its added entertainment selling points and features.

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

In configuring a casino hotel development it thus remains important to understand the market and financial dynamics together with their 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 having a ten year balloon/refinance, where you can 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 at the overall efficient technique asset.

Moreover, if the intent might be to attract additional casino patronage from a wider market radius, it is to measure the cost of any hotel subsidy versus the potential increase in gaming profits. A new 200 room hotel at an e-casino already generating 20,000 weekend visitors, may only 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 spot.

Ideally, these types of facilities, if not situated in markets with insufficient local/day-trip markets (e.g. Laughlin), end up being configured because of their non-gaming related and off-peak period support so related to maintain relevant room rates and adequate levels of profitability. They should also include those amenities these markets are seeking, including, where applicable: conference and convention facilities, and indoor/outdoor recreational nutrients.

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 benefits. According to the latest data, there are more than 9 million households in fantastic that own RVs, and represent one of every ten vehicle owning households. As households include the 55 & over age groups, in which have a compared to average gaming propensity and annual take-home pay.

RV Park development expense is well below those for hotels, truly have a significant seasonal use, peaking through the 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 country. First represented by casino logo shops and several high-roller/jackpot-winner positioned boutiques, these stores have recently grown into major malls and entertainment centers. The Forum Shops at Caesar's Palace in Las Vegas enjoys the best per sq . ft . sales regarding retail malls in the U.S., and also the growth in retail sales in the city is significantly outpacing regarding gaming revenue. The presence of these shops serves as both an activity to the area's 35 million annual visitors, of which are now being economical than 4 hours everyday 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 that your 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 to attract the "adjunctive" daytripper market. The extent and characteristics of these stores in order to scaled for the potential market, current visitation trends, or any local atmosphere.

Entertainment

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

With most major entertainment events occurring during the weekend periods the attracted audiences mightn't have any significant impact on the likely already busy season. Therefore it in incumbent that the specific event be structured so concerning at least break even or turn a small profit. While this is somewhat self evident, a lot more 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 normally do not have the cache in the fixed venue that is a vital part of the casino facility.

Recreational Facilities

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

As with all of the other revenue enhancing reinvestment alternatives discussed herein, recreational facility development should be thought about within the context with the ability to generate additional casino patrons and/or serve as a profit room. Whereas golfers traditionally have an excessive gaming proclivity the association of golf with an e-casino is accomplishment in sync, given the length of time vital for a typical round. Moreover, even your highest utilization rates, a typical 18 hole golf course will only accommodate about 140 players per day, while nationwide average in year round environments talks about 100 rounds per day. This is not a regarding additional players for the casino, even if all of them gambled, as well as considering fat loss programs definitely an average course, excluding land, ranging between $5M to $15M.

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

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

Importantly, the program should illustrate how each element will be coordinated into the overall facility fabric along with the manner that will be financed. Some funding can stem from reserved profit allocations, whilst independently funded with additional debt, whose amortization may be factored into the overall project's feasibility explore.

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