CASINO IDEAS FOR EXPANSION

The Proper Care and Feeding for the Golden Goose

Under the new paradigm of declining economic conditions across a broad spectrum in consumer expenditure, gambling establishments face particular challenges in figuring out how they both maintain profitability while also remaining competitive. This is further complicated in the commercial gaming industry due to rising tax rates and also within the Indian gaming sector , by self imposed contributions to tribal general funds, or per capita distributions, in addition to an increasing trend of state imposed fees.

Deciding how much to “render to Caesar,” while reserving the necessary funds to preserve market share, expand market share and increase profitability, is a daunting task which must be properly organized and carried out.

It is within this context and from the perspective of the ทดลองเล่นสล็อต author, which includes time and grade hands-on experience in the development and management of these kinds of investments, that this article relates ways that can be used to plan and prioritize the casino reinvestment strategy.

Cooked Goose

While it seems logical never to boil the goose that lays eggs of golden color however, it is astonishing that there isn’t much thought at the time given to its proper feeding and care. When a new casino, developers/tribal councils, financiers and investors are rightfully anxious to reap the rewards and they tend not to dedicate a sufficient portion of the money to asset maintenance & enhancement. Thereby begging the question of how much of profits should be allocated to the reinvestment process, and to what goals.

As each casino project is unique, and comes with specific situation there aren’t any hard and fast guidelines. For the most part there are a lot of major operators of commercial casinos do not pay net profits as dividends to stockholders, instead they invest them in improvements to existing casinos while in search of new locations. Some such programs paid for by other capital instruments, such as equity stock offerings. The lowered tax rates on corporate dividends will likely shift the emphasis of these financing strategies but they will still adhere to the core business prudence of ongoing reinvestment.Profit Allocation

Collectively and prior to current economic situation, public companies had a net profit percentage (earnings before income tax and depreciation) that is about 25% of their income after deducting the tax on revenue and interest. On average, close to two thirds of earnings are used to fund investment and replacement of assets.

Casino operations in low gross gaming tax rate jurisdictions can more easily reinvest in their properties, thus boosting revenues that can ultimately benefit taxpayers. New Jersey is a good example, as it mandates certain reinvestment allocationsin order to act as an incentive to increase revenue. Other states, like Illinois and Indiana with more effective rates, face the risk of reducing investment in reinvestment. This could ultimately diminish the capacity of casinos to boost market demand penetration particularly as states around them become more competitive. Moreover, effective management can increase the amount of profit available for reinvestment, stemming from both efficient operations and favorable borrowing & equity offerings.

The way a casino company decides how to spend its casino profits is a critical element in determining the viability of its business over time and should be an integral element of the initial development strategy. While short term loan amortization/debt prepayment plans may initially appear appealing to free yourself from under the obligation however, they also drastically decrease the possibility of reinvesting/expanding at a rapid pace. This is the case for any profit distribution for investors or, in the case of Indian gaming projects, distributions to a tribe’s general fund for infrastructure/per capita payments.

Furthermore, many lenders commit the mistake of requiring excessive reserve for debt service and putting restrictions on reinvestment , or even additional leverage which can limit a given project’s ability to keep its competitiveness intact and/or make the most of opportunities.

Although we don’t advocate that all profits should be reinvested to the business we do encourage the creation of an allocation plan that considers the “real” expenses of managing the asset and maximising the impact of this program.

Establishing Priorities

There are three essential elements of allocation of capital that need to be considered, as shown below and in order of priority.

1. Maintenance and Replacement

2. Cost Savings

3. Revenue Enhancement/Growth

The first two aspects are simple enough to comprehend since they directly impact on market positioning and boosting profitability. However the third one is a bit complicated in that it has the potential for more indirect effect that requires a deeper knowledge of market dynamics and greater investment risk. The entire subject matter is further will be discussed.

Maintenance and Replacement

Maintenance and replacement plans should be an integral part of the annual budget of the casino, that is a reserve based on the projected replacement costs for furniture, fixtures, equipment or building, as well as systems, construction and landscaping. We often have annual wish lists that bear no relationship to the actual wear & wear and tear of these objects. It is therefore important to plan the replacement cycle, allocating the funds that don’t necessarily need to be used during the year of accumulation. In the beginning, it may not be important to spend money to replace brand new assets, however by accruing amounts to be reserved for their eventual recycling will ensure that there is no need to hunt for funds to be used when they’re needed.

One area of special consideration is slot machines which have a replacement cycle that has been slowed down in recent times because newer games and technologies are evolving at a higher rate and in line with what competition dictates.

Cost Savings

Investment in cost savings programs and systems is, in their nature, and provided that they are properly studied, a safer use of profits-allocation funds than any other investment. These can typically take shape of methods to save energy as well as products that save labor that are more efficient in purchasing intermediation and interest reductions.

These products come with their own caveats One of them is to carefully analyze their claimed savings against your specific situation, as often products’ claims are exaggerated. Lease buy-outs and long term prepayments of debt can be advantageous, especially when the commitments were made during the stage of development, when equity funds may have been restricted. In these cases it is crucial to analyze this strategy’s net effect for the business’s bottom line in comparison with alternative ways to use the money to boost revenue or invest in growth.

One of the recent trends is the rising popularity of cashless slot machines which, in addition to providing labour savings on fills, counts and hand-pays, but also serve as an aid to patrons who do not like carrying around heavy buckets of coins, as well as encouraging multi-game play.

Revenue Enhancing & Growth

Leveraging is the main factor in any growth/revenue associated investment. It includes:

Patronage Base

o Funds Available

o Lands

• Marketing Clout

o Management Experience

The goal is to increase the use of the available asset to generate more revenue and profitability. Some examples are increasing average patronage base spending and expanding the trade area by providing additional products/services, such as retail stores, entertainment options like leisure or recreational amenities including overnight accommodations, eateries, and of course, expanding gaming.

Master Planning

Potential growth and expansion should be fully integrated into the plan’s initial master plans to ensure a seamless integration of all the aspects of a planned-in phase in order to ensure the least amount of operational interruption. Unfortunately, it’s not always possible to predict market trends thus expansion options should be carefully considered.

The Big Picture

Before embarking on any sort of enhancement or expansion program, we recommend taking a step back and taking a look at your property’s current position in relation to the market and competitive landscape. As we have observed in a variety of gaming jurisdictions across the country, often casinos that were operating “fat and happy” for a period of time however, are in a period of no growth. This can be because of competition from local area casinos or regional venues which can result in a decrease in the number of patrons coming from other markets in the area. In addition, the existing patrons may become bored of their experiences and are seeking greener pastures. The growth history of the Las Vegas strip is testament to the power of continuously “reinventing” your self.

Our approach to these market studies is primarily based on determining the degree to which the current facility is reaching out to the potential market and in relation to any competitive market shares. This typically involves an analysis of the existing patronage base based on data gathered from the player tracking data base, and mailing lists, coupled with day-part, daily, weekly, monthly and seasonal revenue trends.

The data is then integrated and analyzed in relation to the overall market potential to indicate the extent to which certain market segments are utilizing the facility, and what needs it is fulfilling. More importantly however, is that this kind of analysis can reveal market segments that are not taking advantage of the facility more, and why.

Occasion Segmentation

According to our research revealed, the casino market is classified by different aspects of event-based use, as well as regular patterns of spending and visitation. Traditional methods of market measurement, such as gravity models, generally consider the demographics of a given population, by comparing revenues in similar markets. However, a segmentation of events market analysis reveals more detailed details about the factors precipitating a casino visit and their relationship to the benefits targeted, and the degree that the event determines the amount spent and frequency of visits. This kind of data mining is far more effective than gravity modeling, in that it can aid in determining the best services and positioning strategies that are required to draw each market segment, by measuring their contributions to the global potential. This technique has been successfully employed in the restaurant business and other leisure-time service industries with a particular focus on a growing market for supply and demand.

Perhaps more important, looking at this market through an occasioned-use perspective, reveals the extent and nature of the underling competition. This can often, does not just includes other casinos, but also other entertainment options and leisure time activities, including clubs, restaurants theatres, restaurants, and so on.

Demand Density

Another significant aspect of segmentation is to measure the general characteristics of the market by day-parts. This is the revenue density by time of the day, weekday daily, monthly and seasonalally. This is particularly important in the case of casinos that are looking to limit any more than normal fluctuations that could be occurring between a slow Monday morning and a busy Saturday night; or that experience severe seasonal variations.

By separating markets according to their patterns of demand and patterns, a better understanding will be gained about which amenities could help to boost the slow demand times, and others that could simply add to already maximized peaks.

Many expansion programs often are prone to arranging extra amenities like luxury restaurants and lodging elements in line with the highest demand periods. In the end, the net effect of costs and expenses for these investments could negate any contribution they might make to increasing gaming revenues. However, “fill-in” markets are the most efficient method to increase revenues overall since they draw on 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 of utilizing occasion-segmentation is its ability to also indicate the potential impact certain amenities have on “impelling” visitation. While gravity models examine the characteristics of gambling-related spending of a specific market, the formulas cannot measure the impact of other non-gaming-related activities that may nonetheless generate casino traffic.

Relevant data about the frequency of use by people who go to restaurants entertainment, entertainment, and weekend getaways often form the foundation on which to focus amenities designed to serve these segments; which in turn, increase visitation. Although many of these people may or may not utilize the casino and their exposure to this chance could boost their utilization in addition to creating an additional revenue source.

Looking at in the direction of Las Vegas paradigm, more and more of the strip hotels are now generating nearly, if certainly as, or even more, revenue from non-gaming activities than gaming revenues. As their hotels and restaurants are less & less subsidized, and together with their increasing retail components contribute significantly to the bottom line.

Program Development

When you have a good knowledge of market dynamics that are affecting the market, both in terms of the existing facility’s current market shares/penetration rates in relationship to the mix of competitors, as well as the overall use that the marketplace is able to provide, an matrix may be constructed to set an equilibrium between the market’s demand and supply. This function seeks to identify areas of un-met demand opportunities or oversupply, which forms the spring-board to the development of appropriate amenities, upgrade and expansion guidelines and strategies.

Impact Criteria

The basic idea is that there are two kinds of upgrades and expansion strategies that are subsidized and profit-centers. Subsidized elements can include the addition of or enhancing amenities that increase the current market share of gaming which will have a direct impact on growing casino revenues Profit centers are intended to leverage the current patronage patterns by providing additional spending options, and have an impact directly on gaming activity. While many of the more traditional facilities, like restaurants, hotels, retail shops, entertainment venues and recreational facilities can be included in one or both of these categories, it is important to make the distinction, so as to clearly define the design and development criteria.

Upgrading/Expansion

As we’ve previously talked about, Las Vegas continually seeks to reinvent itself as a means to increase repeat visitation, that in itself creates the effect of snowballing since each venue has to be able to keep pace with its counterparts. To some extent upgrading programs, such as the creation of a fresh and new design, functions like an insurance policy against slipping revenues, and do not necessarily correspond to increases in revenues per se. Don’t confuse them with new carpeting replacement and slot machine recycling, an upgrade program should seek to increase the excitement surrounding the facility in terms of design, ambiance, finishes, layouts, and overall décor.

The expansion of capacity already in place is not a result of market analysis and more a necessity of “making the most of the time when the sun shines,” based on a thorough understanding of the patterns of visitation density. Patron back-ups for casino tables and gaming spots could be good or negative, based upon when they happen and how frequently. In the case of high per position daily net wins aren’t always indicative of a prospering casino, as they could also mean wasted opportunities due to the insufficient amount of games. Conversely, additional positions are unlikely to always produce similar averages.

In the beginning, when determining capacities for the construction of a new facility, it is essential to fully evaluate the demands patterns into their parts of the day that will allow for maximum utilization during peak times and minimize inefficiency – the point at which the expense associated with additional capacity is overshadowed by the net profit potential.

Food and Beverage Facilities

The majority of casino venues’ dining facilities can be described as “loss leader,” designed to retain and attract patrons to casinos with low prices and great value; yet they have the capacity to increase the opportunities for casino patrons to use the casino as well as be potential profits centers.

In Nevada which is the only state where specific historical F&B departmental operational results have been made available to casino owners casinos that generate gaming revenues between $20M and $200M revealed food establishments with a net departmental loss of 1.5 percent of revenue in 2001, against a nearly 14% loss in the year 1995.

The major reason for this improvement is due to increase in food establishments, specifically more upscale/specialty restaurants, which has boosted sales to 20% gaming revenue in 1995 to almost 27% in 2001. Moreover, food costs have decreased dramatically from 45percent in 1995, to 35% in the year 2001.

As the previous discussion on occasion-segmentation revealed, a consumer’s choice of a casino visit can sometimes compete with other entertainment/leisure time activities, including dining out. A market-relevant restaurant inside the casino could serve to attract the dining-out customer as well as benefitting the casino from its close proximity. So, when market conditions suggest that a casino’s restaurant needs to change arrangement, the main issues to be answered are how they can be designed to satisfy the current customers, expand the use of occasioned services and increase profits.

Lodging Elements

With turnkey hotel development expenses in the range of $75K-$350K per available room marketing strategy ought to be studied thoroughly. We see numerous projects that are undertaken with no understanding of the dynamics of the market and their economic implications.

According to our most recent study, the number of casinos is 724 across the country. They are comprised of 442 commercial enterprises, around half of which are located in Nevada as well as 282 Indian gaming establishments, of which 209 are home to the majority or all, of Las Vegas type (Class III) games. Around 58% of casinos operating in the commercial gaming sector have co-located hotels with 37% from Class III Indian gaming venues, despite them having the same average amount of games.

The large proportion of hotels within the commercial industry is due to certain gaming jurisdictions which require these hotels; for instance, Nevada (for an unrestricted license) in addition to New Jersey. In addition, a significant portion of Nevada demand for market services comes from outside a daytrip’s radius, making overnight accommodations necessary to secure market share. If you take these states as the overall, the share of all commercial casinos with hotels is reduced by 50% with an average 312 hotel rooms & 1,183 games.

The primary benefit of gambling establishments is the ability to draw gambling markets that go beyond the normal day-trip radius, while also having some sort of “captured” segment of the market (Casinos along with Hotels). Additionally, guest rooms could be a different incentive for players to earn club points. Hotels can also increase a casino’s occasioned-use by offering other leisure and entertainment options that are not gaming and are complemented by the readily access to gaming, while being a profit-making center (Hotels with Casinos). Additionally, within a traditional hotel or lodging establishment, a casino has a competitive advantage by virtue of its added entertainment amenities.

Among the major Las Vegas properties there are more rooms for hotels than games in the city, which is because it has changed from a gaming destination to becoming a more resort and convention location. As a result, these properties increased their hotel’s profit and investment return by not needing to offer low prices to attract players. Some areas, such as Laughlin and Reno, which do not have the mass appeal of a Las Vegas, still find it necessary to supplement the hotel’s revenue by generating casino revenues, because of low room rates as well as the high frequency of seasonal visits

In the process of determining a casino hotel development it is therefore important to be aware of the market and financial dynamics and their impact on overall gaming revenue as well as profits. Within the free-standing (non-casino) hotel industry, the financing terms are typically over a 15 or 20 year amortization period, with a ten year balloon/refinance, and have a break even threshold that is close to 70% to 65% occupancy. The typical casino-based lodging components are occupied at high levels during weekends, however lower levels during the week. It’s therefore not necessary to “build an Easter church to celebrate Easter Sunday,” considering the efficiency of the asset.

Additionally, if the intention is to attract additional customers to casinos from a greater area of market, it’s essential to consider the expense of any hotel subsidies versus the potential increase in the gaming revenue. A new 200 room hotel in a gambling establishment that is already producing more than 20,000 weekend guests, might just be adding 2to 4 percent more players, while exposing the hotel to greater costs. Concerning occasioned-use, especially for weekenders and tourists casinos could be competing against other resorts in the area.

Ideally, these types of facilities, if not located within markets that do not have sufficient local or day-trip markets (e.g. Laughlin) are designed on the basis of their non-gaming-related, off-peak periods of support to maintain relevant room rates and a sufficient level of profit. The hotel should also provide the facilities that these markets want, including, where applicable meeting and convention facilities as well as indoor and outdoor recreational components.

Though they’re more of a niche market, RV Park facilities are an investment that is less costly in overnight lodging facilities that can still provide the same benefits. According to the latest data there are more than 9 million households in the United States that own RVs and make up one of each ten car-owning households. Many of these households belong to those aged 55 and over and over age groups, with more than the average propensity to gamble and an annual income.

RV Park development costs are significantly lower than hotels however, they typically have a high seasonal use, peaking during summer in resorts in warmer climates and during winter when they are located in “snowbird” areas.

Retail and Outlet Shops

Retail/Outlet shopping is beginning to gain a significant presence in casinos across the country. First represented by casino logo shops and 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 the highest per square foot sales of any mall that is retail-oriented in the U.S., and the growth in retail sales within the area is significantly over the growth in gaming revenues. The presence of these shops acts as both a draw for the area’s 35 million annual visitors who are now spending less than four hours per day actually playing, as and a major revenue center that leverages the visitation base.

In smaller resort-style outlets, they are significant traffic generators from which casinos can gain patronage. On smaller scales casinos could expand their occasioned-use by offering unique and indigenous shopping that is specially designed to appeal to people from an “adjunctive” tourist market. The extent and characteristics of these stores need to be scaled to the potential market, visitor trends and local ambiance.

Entertainment

Even though entertainment is a staple in casinos, it has its roots from earlier Rat Pack days in Las Vegas as well as today’s impressive arenas and concert venues, as well as specialty shows and their economics are often under-appreciated. They’re at the same time, diversions and attractions, profit centers, and public relation tools. However, they can also cause significant losses and therefore should be well researched to determine the best configuration.

In the case of most major entertainment occasions occurring during weekend period, the audience that is attracted might not be a significant influence on an already busy time. It is therefore essential that the specific event be planned to at a minimum break even or generate a profit. While this may seem obvious, the important issue is the entertainment venue’s capability to also reduce the initial cost of its and investment. Outdoor venues can dramatically reduce construction costs, but also have a tendency to be subject to weather changes and seasonal usage. Furthermore, tents for parties and temporary structures typically don’t have the cache of a permanent location which is an integral element of the casino’s facilities.

Recreational Facilities

There is a lot of interest at present being paid to the creation of facilities for recreation at casinos, specifically the ones associated with resorts. Golf courses are a typical adjunct to many resorts, and many Indian communities benefit from the advantages of being able to access the large land areas and water rights these types of projects require.

Like all other revenue enhancing reinvestment alternatives discussed herein, recreational facility development should be considered in the context of its potential to increase the number of casino patrons as well as serve as an opportunity to earn money. Although golfers generally have an inclination to gamble, the association of golf with the casino isn’t on the same page, considering the amount of time needed to complete a typical round. Moreover, even under the most efficient utilization rates, the average 18 hole golf course can only accommodate around 140 players every day, whereas the standard for the nation in all-year-round environments is approximately 100 golf rounds per hour. That’s not a great number of extra players at casinos, even though all were gamblers, and especially when considering the price of a typical course excluding land, ranging between $5 million and $15 million.

However, a golf course’s development within a package for resorts and/or to fill a local market demand can have many non-gaming related benefits. From a resort development standpoint, a golf course as well as other recreational elements can add to the facility’s competitive positioning, to the point where its development/operating costs can be recaptured through higher room rates/green fees. Traditional golf courses often “pencil-out” by incorporating fairway sites that have a particularly higher value than sites that are not golf course-related. Because of the trust status of Indian land, this might be somewhat problematical on reservation areas, unless any kind of lease for land with a long-term term could be negotiated for the home owners.

Planning/Financing & Implementation

After all the important market variables have been weighed and weighed against the cost and. advantages, a complete reinvestment & expansion program will begin to form. A design and construction team must be formed to further help interpret the program’s scope in terms of the innovative and value engineering aspects as well as maintaining its established market positioning and financial strategies.

Importantly, the plan should demonstrate how each component will be integrated into the overall facility fabric and how it will be funded. Certain funding sources can be derived from reserve profits, and others are funded independently by additional debt and whose amortization has been taken into account in the overall feasibility study.

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