Casino Reinvestment and Expansion
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 novel 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 with a 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 in our context and the author’s perspective defeat time and grade hands-on experience typically the development and therapy of these types of investments, that this brief article relates ways to plan and prioritize a casino reinvestment strategy.
Although it seems axiomatic not cooking the goose that lays the golden eggs, it is amazing how little thought is oft times given to its on-going proper care and feeding. Using the advent of a newer casino, developers/tribal councils, investors & financiers are rightfully anxious to reap the rewards and every tendency not to allocate a sufficient amount of the profits towards asset maintenance & enhancement. Thereby begging the question of just how much of the profits should be allocated to reinvestment, and towards what goals.
Inasmuch as each project has its very particular set of circumstances, there aren’t an hard and fast rules. For probably the most part, many belonging to the major commercial casino operators do not distribute net profits as dividends to their stockholders, but rather reinvest them in improvements to their existing venues as well as seeking new buildings. Some of these programs are also funded through additional debt instruments and/or equity stock securities offerings. 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 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 for this 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 at some point benefit the tax base. 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 probability of reducing reinvestment might be eventually erode ale the casinos to cultivate market demand penetrations, especially as neighboring states become more competitive. Moreover, effective management can generate higher available profit for reinvestment, stemming from both efficient operations and favorable borrowing & equity offerings.
How a casino enterprise decides to allocate its casino profits is a very important element in determining its long-term viability, and should be an integral part of the initial development schedule. While short term loan amortization/debt prepayment programs may initially seem desirable so as to quickly come rid of under the obligation, they can also sharply reduce the ability to reinvest/expand on a timely basis. This is also true for any profit distribution, whether to investors or you do not 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 become seriously limit a given project’s ability to take care of its competitiveness and/or meet available probabilities.
Whereas we are not 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 will be considered, as shown below and in order 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 an immediate affect on maintaining market positioning and improving profitability, whereas, the third is nearly problematical in that this has more of an indirect affect demands an understanding of your market dynamics and greater investment real danger. 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 by the projected replacement costs of furniture, fixture, equipment, building, systems and landscaping. The amount of work however % annual wish lists that bear no relationship into the actual wear & tear of these items. It is therefore in order 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 mother and father seem important for spend little money on replacing of brand new assets, however by accruing amounts being reserved for their eventual recycling will avoid having to scurry for that funds once 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, because the competition dictates.
Investment in cost savings programs & systems are, by their very nature and in case adequately researched a less risky regarding profit allocation funding then almost additional investment. These tools 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, amongst the which through using thoroughly analyze their touted savings against your own particular application, as in many cases the product claims are exaggerated. Lease buy-outs and long term debt prepayments can be advantageous, particularly if the obligations were entered during advancement stage when equity funds may also been limited. In those 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 will be the growing 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 operation.
Revenue Enhancing & Growth
Leveraging could be the key catalyst of any revenue enhancing/growth related option. It includes the following:
o Patronage Base
o Available Funds
o Marketing Clout
o Management Experience
The principal is to leverage the actual usage of of the available 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 included in the project’s initial master planning as a way it assure cohesive integration of payday advance elements in the phased-in program, while also allowing for the least amount of operational dysfunction. Unfortunately, it’s not always possible should be expected market changes, so expansion alternatives end up being carefully taken into account.
The Overall dish
Before beginning any involving expansion and/or enhancement program we strongly suggest first stepping back and assessing the property’s present positioning relative to the market and competitive environment. Once we have affecting numerous gaming jurisdictions close to the country, often casino ventures that also been operating «fat and happy» for a few years, feel the in a zero-growth period. Sometimes this is mainly because competition stemming from either/both new specific geographic area casinos or regional venues that include the affect of reducing patronage from peripheral area money markets. Additionally, the current customer base may get bored with their experience and are seeking greener pastures. The historical involving the Sin city strip is testament into the success of continually «reinventing» oneself.
Our techniques for these market studies is initially specifically for determining the degree to which the current facility is penetrating the potential market also relationship to your competitive market shares. Typically, this represents an research into the current patronage base in terms of of information gleaned over player tracking data base, and mailing lists, along with day-part, daily, weekly, monthly and seasonal revenue programmes.
This information is then interfaced with an exam of the overall market potential to indicate the extent that certain market segments are using the facility and also the needs it is fulfilling. More importantly however, often that this associated with analysis will indicate those market segments that aren’t utilizing making a fleet of more fully, and reasons to.
As our proprietary possess indicated, casino markets are segmented by various characteristics of occasioned-use that likewise incorporate typical spending & visitation patterns. Normal 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 details as into the reasons precipitating a casino visit, that they relate for the benefits being sought, and also the degree this agreement the occasion determines average spending and visitation frequency. This type of data mining is more helpful than gravity modeling, for that it might determine form of of facilities and positioning strategies required attract each market segment, by measuring their relative contribution to the aggregate promise. The process has been successfully utilized in the restaurant business additional leisure time service industries, especially amid a widening supply/demand put.
Perhaps considerably importantly, thinking of the market from an occasioned-use perspective, reveals the extent and characteristics for this underling competition, that, in a range of cases not really include other casinos, however alternative entertainment and leisure time activities, such as restaurants, clubs, theaters, along with the like.
Another important factor of occasion segmentation is in measuring overall market characteristics by day-parts, which is revenue density by period of day, day per week, weekly, monthly, and seasonally. This is especially important data when casino venues are searhing for to lessen any higher than normal fluctuations that in a position to occurring from a slow Monday morning which has a packed Saturday night; or that experience severe seasonal variations.
By segmenting markets by their demand patterns, a better understanding can be gained that amenities can help you bolster the weak demand periods, and people that may possibly add into the already maximized peaks.
Many expansion programs often make the mistake of configuring additional amenities such as high-end restaurants and lodging elements based on the peak demand periods. As a result, towards your effect of costs & expenses for these investments can negate any contribution they may make to increased gaming revenues. Rather, «fill-in» investing arenas are the most efficient means enhance overall revenues, as they utilize existing capacities. Las vegas, nevada has achieved great success in creating strong mid-week activity through promotion of your extensive conference/convention facilities.
Amenity Driven Markets
Another good thing about utilizing occasion-segmentation is its capability to also indicate the potential impact certain amenities placed on «impelling» visitation rights. While gravity models examine the casino related spending characteristics from the given market area, the formulas cannot measure the relative impact of any non-gaming driven activities that nonetheless generate casino prospects.
Important data relating into the population’s occasioned-use of restaurant, entertainment, and weekend getaways can often form the basis on which to focus amenities in order to cater to the people markets; bya so doing, increase visitation. Whereas many of these patrons might or might not develop casino, their exposure towards opportunity may hasten their use, while also creating another profit center.
Again, in order to the Sin city paradigm, more and more for 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 along with their growing retail elements, represent strong contributors on the bottom bond.
Once along with a basic understanding for the market dynamics, both have to address the existing facility’s market place shares/penetration rates in relationship to the competitive mix, and the existing occasioned-use on the market, a matrix can be created that sets the demand against the unbooked time. This function seeks to identify areas of un-met demand opportunities and/or over supply, that forms the spring-board to the development of relevant amenities, expansion and upgrade criteria & practices.
Essentially you will two kinds of expansion/upgrade strategies: subsidized and profit-centers. Subsidized elements normally include adding and/or improving amenities that will further widen current gaming market penetration/shares, thusly developing a direct impact on growing casino revenues; while profit centers are made to further leverage current patronage patterns with additional spending opportunities, and possessing an in-direct cause problems for 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 to make the distinction, so related to clearly establish the design/development criteria.
As recently been previously discussed, Las Vegas continually seeks to reinvent itself like a means to raise repeat visitation, that in itself creates a snowballing affect as each venue must keep-up featuring a neighbor. For the extent upgrading programs, may include developing a new and fresher look, is a lot like a coverage policy against slipping revenues, and do not necessarily refer to any incremental growth by itself. Not to be mistaken for replacement programs of worn carpeting and slot machine recycling, an upgrade program should seek produce new excitement about making a fleet of in comparison to its 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,» centered on a thorough understanding within the visitation pattern densities. Patron back-ups for gaming positions and restaurant tables could be both good and bad, depending on when they occur and how often. High per position per day net win averages are not always a symptom of a prospering casino, as they can also mean lost opportunity because associated with the insufficient number of games. Conversely, additional positions are not at all times going create the same averages.
When initially configuring capacities for a better facility, it is really important to fully evaluate require patterns into their respective day-part components that can maximize penetration during the peak periods while minimizing inefficiency — the attachment site where per annum . associated with additional capacity is exceeded by its net profit potential.
Food & Beverage Amenities
Within most casino venues, restaurant amenities are «loss leaders,» designed to retain & attract casino patrons with low prices and great value; yet they find a way to both widen occasioned-use of the casino, whilst representing potential profit treatment centers.
In Nevada, which could be the only state where detailed historical F&B departmental operating results are there for casinos, properties with gaming revenues averaging between $20M to $200M showed food operations having a net departmental involving 1.5% of sales in 2001, versus almost a 14% loss in 1995.
Much of these major turnaround is simply because of the boost in the number of food outlets, especially more upscale/specialty restaurants, which has spurred sales from 20% of gaming revenue in 1995 to almost 27% in 2001. Moreover, food costs have been reduced sharply from 45% in 1995 to 35% in ’01.
As the last discussion on occasion-segmentation revealed, a consumer’s choice of a particular casino visit can sometimes compete along with other entertainment/leisure time activities, including dining outside. Having a market relevant restaurant facility within the casino can serve to attract the dining-out destination market, with the casino cashing in on its proximity. Therefore when market conditions indicate a change in a casino’s restaurant configuration, the questions to be addressed are just how can they be designed to get to know 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 understanding of the market dynamics and economic effect on.
Nationwide, internet site our current survey, may find 724 casinos around the country; made up of 442 commercial operations, most of of which are located in Nevada, and 282 Indian gaming venues, of which 209 offer most, not really all, of Las Vegas type (Class III) console games. Roundly 58% of casinos in industrial municipal debt market gaming sector have co-located hotels, unlike 37% of sophistication III Indian gaming venues, despite their containing a similar average number of games.
The high preponderance of hotels included in the commercial sector owes replacing gaming jurisdictions requiring them; including Nevada (for an unrestricted license) and New jersey. Moreover, much within the Nevada market demand is caused by 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%, through average of 312 rooms & 1,183 games.
The obvious advantages of casino lodging units is the ability appeal to gaming markets from beyond the typical day trip radius, as well as having a somewhat «captured» market (Casinos with Hotels). Moreover, guest rooms can be another perk-use for player club parts. Hotels also widen a casino’s occasioned-use by offering non-gaming leisure activities & amenities, augmented by the ready associated with gaming, while also representing another profit center (Hotels with Casinos). Additionally, within an old-fashioned lodging setting, a casino/hotel has a competitive advantage because of its added entertainment features.
Among nearly all Las Vegas properties may more hotels than games, as metropolis transits from the local gaming destination to more for a resort & convention travel. In so doing these properties increased their hotel profitability and investment returns by without to offer low rates to attract gamers. Whereas, some areas such as Laughlin and Reno, which don’t enjoy the critical mass of a Las Vegas, still discover it necessary to supplement their hotel investment with casino revenue, brought about by low room rates and larger seasonal visitation fluctuations
In configuring a casino hotel development it thus remains important to recognise the market and financial dynamics and the impact on overall gaming revenue and profits. Within the free-standing (non-casino) hotel industry, financing terms are usually over a 15 to twenty year amortization schedule with a ten year balloon/refinance, and have a 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. Involved with therefore incumbent not to «build a church for Easter Sunday,» keeping under consideration the overall efficient involving the residence.
Moreover, generally if the intent is always to attract additional casino patronage from a wider market radius, it is very important to read the cost of any hotel subsidy versus likely increase in gaming profits. 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 improve costs. When considering to occasioned-use, especially among tourists and weekenders, casino hotels may also be competing with alternative resorts in the spot.
Ideally, these kinds of of facilities, when not situated in markets with insufficient local/day-trip markets (e.g. Laughlin), in order to be configured on the basis of their non-gaming related and off-peak period support so as to maintain relevant room rates and adequate levels of profitability. Should also include those amenities these markets are seeking, including, where applicable: conference and convention facilities, and indoor/outdoor recreational properties.
Albeit associated with a niche market, RV Park facilities are a less intensive investment in overnight lodging facilities required nonetheless offer some of the same rewards. According to the latest data, or even more than 9 million households globe United States that own RVs, and represent definitely every ten vehicle owning households. Another thing these households include the 55 & over age groups, who’ve a higher than average gaming propensity and annual income.
RV Park development price well below those for hotels, truly have a high seasonal use, peaking the actual summer months in temperate resort environs and in the winter months typically the «snowbird» types.
Retail/Outlet shopping is gaining a major foothold at casino venues across the state. First represented by casino logo shops and the 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 outrageous per sq . ft . sales associated with retail malls in the U.S., as well as the growth in retail sales in the city is significantly outpacing associated with gaming return. The presence of these shops can both a task to the area’s 35 million annual visitors, in which now being economical than 4 hours per 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 casino facility can draw patronage. On the smaller scale, casinos can widen their occasioned-use by providing unique and indigenous shopping that is incredibly positioned appeal to the «adjunctive» daytripper market. The extent and characteristics of these stores should be scaled to the potential market, current visitation trends, and then any local environment.
Although entertainment is a mainstay in casino environments, stemming using the Rat Pack days in Las Vegas, to today’s imposing concert/arena venues and specialty shows; their market dynamics tough misunderstood. They are at once, diversions, attractions, profit centers, and public relation stuff. They can however, also generate major losses, which means that should be studied ascertain their appropriate configuration.
With most major entertainment events occurring during the weekend periods the attracted audiences don’t have any significant have an effect on a likely already busy period. Thus it in incumbent that fairly event be structured the best way to around break even or turn a small profit. You will see that is somewhat self evident, the more central dilemma is the entertainment venue’s power to also amortize its initial development cost investment. Outdoor facilities can sharply reduce construction costs, but are as well prone to weather vagaries and seasonal use. Moreover, party tents and temporary structures really don’t have the cache in the place of fixed venue that a great integral part of the casino facility.
There will be a lot of attention these days being directed at the development of recreational facilities at casino venues, specifically those associated with resort . Golf courses are a typical adjunct since resorts, and often those Indian communities enjoy procedures you take . of access the ample land areas and water rights loaded with of undertakings require.
As with the other revenue enhancing reinvestment alternatives discussed herein, recreational facility development end up being considered within the context of its ability to generate additional casino patrons and/or serve being a profit center. Whereas golfers traditionally possess a high gaming proclivity the association of golf along with a casino isn’t exactly in sync, due to the length of time required in a typical set. Moreover, even under the largest utilization rates, a typical 18 hole golf course will only accommodate about 140 players per day, while the nation’s average in year round environments is 100 rounds per day. This is not plenty of of additional players for that casino, regardless if all analysts gambled, and also considering certainly an average course, excluding land, ranging between $5M to $15M.
However, the game of golf development as part of a resort package and/or to fill a neighborhood market demand can have lots of non-gaming related benefits. From a resort development standpoint, a golf course as well as other recreational elements can combine with the facility’s competitive positioning, to the place 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, possess a particularly higher value than non-golf course businesses. Given the trust status of Indian lands, this may be somewhat problematical on reservation lands, unless some kind of long-run land leases could be negotiated for the home managers.
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 commence to take compose. A design & construction team should be assembled definitely not necessary help further interpret the possibility in relation to its creative and value engineering input, while maintaining its established market positioning and financial advertisments.
Importantly, this program promises should illustrate how each element tend to be coordinated into the overall facility fabric as well as the manner by it will financed. Some funding can stem from reserved profit allocations, other people independently funded with additional debt, whose amortization already been factored into the overall project’s feasibility analysis.
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