Casino Reinvestment and Expansion
Proper care and feeding for the Golden Goose With the emerging model of economic conditions that are declining across a broad spectrum of spending by consumers, casino face the unique challenge of figuring out how they both maintain the profitability of their operations while remaining competitive. This is further complicated in the commercial gaming industry due to rising tax rates and within the Indian gaming industry, due to self-imposed tribal contributions to general funds and/or per capita distributions, as well as a growing trend in state imposed fees. The process of determining how the amount of money to "render unto Caesar," while also ensuring that the funds are available to protect market share, grow market share and boost profit margins, is a huge task that needs to be meticulously planned and carried out. It is in this setting and from the viewpoint of the author who is based on time and grade-based experience in the design and management of these types of investments this article provides methods in which to plan and prioritize strategies for reinvesting in casinos. Cooked Goose It is common sense not to cook the goose that lay the golden eggs, it is surprising how little thought is paid to its regular maintenance and food. With the opening of an exciting new casino, the developers, tribal councils, investors , and financiers are rightfully anxious to reap the rewards , and the tendency is not to dedicate a sufficient portion of the money to the maintenance and enhancement of assets. Thereby begging the question of what percentage of profits should be allocated to investment, and for what goals. Visit:- As each casino project has specific context there aren't any hard and strict guidelines. For the most part, many of the major casino operators don't distribute net profits in dividends to their stockholders, but rather reinvest them in improvements to their existing venues while also in search of new locations. Some initiatives are paid for by debt instruments and/or equity stock offerings. The tax rate reductions on dividends from corporations will change the focus of these funding methods but they will still adhere to the fundamental business prudence of continuous investing. Profit Allocation In the aggregate and prior to current economic crisis, publicly-owned companies had a net profit ratio (earnings before income taxes and depreciation) that is about 25% of their income after deduction of the gross revenue taxes and interest. In average, two-thirds of the remaining earnings are used to fund investing in assets and for replacement. Casinos operating in low gross gaming tax rate jurisdictions can more easily invest in their properties, thus boosting revenues that can ultimately benefit the tax base. New Jersey is a good instance, as it requires certain reinvestment allocations, as to boost revenue. Other states, including Illinois and Indiana with more effective rates, face the risk of cutting down on investment in reinvestment. This could ultimately diminish the casino's ability to increase market penetration, especially as neighboring states get more competitive. Furthermore, a well-run management system can generate higher available profit to invest, which is a result of both efficient operations and favorable borrowing & equity offerings. How a casino enterprise decides to distribute its casino earnings is a crucial factor in determining its viability over the long term, and should form an integral aspect of the initial development strategy. While loan amortization and debt prepayment plans may initially seem appealing in order to free yourself from obligations but they also restrict the ability to invest or expand quickly. This is also true for any profit distribution, whether to investors or, in the case of Indian gaming , payments to a tribe's general fund to pay for infrastructure or per capita payments. Additionally, many lenders make the mistake of requiring excessive reserve for debt service and putting restrictions on reinvestment or further leverage , which could severely restrict a specific project's ability to maintain its competitiveness and/or meet available opportunities. We aren't advocating the reinvestment of all profits to the business, we are encouraging the idea of an allocation program that takes into account the "real" costs of maintaining the asset, and maximizes its impact. Establishing Priorities There are three key aspects of the capital allocation which should be considered, as illustrated below, 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 have an immediate impact on market positioning and increasing profitability. On the other hand the third option is difficult to comprehend because it has the potential for more indirect affect that requires a deeper understanding of the market dynamics and a greater risk to invest. The entire subject matter is more thoroughly discussed. Maintenance and Replacement Maintenance and Replacement plans should be an integral part of the annual budget for casinos, which represents a fixed reserve based upon the projected replacement cost of furniture, fixture equipment, building systems, and landscaping. It is not uncommon to see annual wish lists that do not reflect the actual wear & tear of these items. It is therefore crucial to properly plan the replacement schedule, and allocate the funds that don't necessarily need to be used during the year of accumulation. In the beginning, it may not seem appropriate to spend money to replace brand new assets, however by accruing amounts to be reserved for recycling purposes, it will ensure that there is no need to hunt for funds at times when they are needed most. A particular area that deserves attention is slot machines, whose renewal cycles have been decreasing lately, since newer games and technologies are being developed at a higher rate and in line with what competition dictates. Cost Savings Investments in cost savings programs & systems are, in their nature, and if adequately researched an investment that is less risky profit allocation than nearly any other investment. They can be in the form of new energy saving methods, labor saving products that are more efficient in purchasing intermediation, and even interest reductions. There are some caveats to these products among them to carefully analyze their claimed savings against your specific use, as frequently the claims made by the company are exaggerated. Lease buy-outs as well as long-term prepayments of debt can be advantageous, especially when the contracts were signed during the development stage when equity funds may have been restricted. In these cases it is essential to evaluate the impact of this strategy in the end, as compared to alternative uses of the monies for revenue enhancing/growth investments. A recent trend is the increase in popularity of cashless slot machines which offer the opportunity to save on labor costs for fills counting, hand-pays and fills but also act as an aid to customers who don't want carrying around heavy coin buckets. They also help in encouraging the use of multiple games. Revenue Enhancing & Growth Leveraging is the most important catalyst of any revenue enhancing/growth associated investment. It includes the following: o Patronage Base Available Funds O Lands • Marketing Clout O Management Experience The principal is to leverage the power of the assets to increase revenues & profitability. Some examples are increasing base patronage spending, and widening the effective trading range by offering additional products/services, such as entertainment venues, retail stores recreation and leisure facilities and overnight accommodation, as well as more restaurant choices, and of course, expanding gaming. Master Planning The anticipation of future expansion and growth must be included in the initial master planning process to make it can ensure a cohesive integration of the various components of a phased-in plan as well as allowing for the most minimal interruption in operation. It's often not possible to anticipate market shifts which is why expansion options should be carefully considered. The Big Picture Before embarking on any sort of enhancement or expansion program, we suggest taking a step back and taking a look at your property's current position in relation to the competitive landscape. As we have observed in various gaming jurisdictions across the nation, many casino enterprises that have been operating "fat and happy" for several years find themselves in a slowing down of growth. Sometimes this is due to competition arising from new local area casinos or regional casinos that are causing a decline in customers from markets outside of the region. Also, the current clients may be bored and are seeking greener pastures. The long-standing growth of the Las Vegas strip is testament to the benefits of continually "reinventing" oneself. Our approach to market studies is primarily based on determining the extent to the present facility can penetrate the market and in relationship to market share shares of any competitors. This typically involves an examination of the current patronage base based on information gleaned from the player tracker database, as well as mailing lists. This is accompanied by day-part, daily, weekly, seasonal and monthly revenue trends. This information is then interacted to assess the overall potential of the market to determine how much market segments are using the facility as well as the requirements it meets. But what is more important is that this kind of analysis will reveal markets that aren't using the facility to the fullest extent and what the reasons are. Occasion Segmentation Our own research has shown, the market for casinos is separated by various aspects of event-based use, as well as frequent visits and spending patterns. The conventional methods for market measures, like gravity models, usually only consider the demographic characteristics of a particular population by comparing revenues in similar markets. However, an occasion-specific market analysis provides more in-depth details about the factors driving a casino visit, how they relate to the advantages sought, and the degree to which the occasion determines the frequency of visitation and average spending. This kind or data mining process is far better than gravity models in that it could assist in determining the kind of facilities and positioning strategies necessary to attract each market segment by evaluating their contributions to the aggregate potential. This method has proven to be effective in the restaurant industry and other leisure time service industries particularly in the context of a growing market for supply and demand. Perhaps more important considering markets from an event-based standpoint, you can observe the size and characteristics of the underling competition. This can often, does not just includes other casinos, as well as other entertainment and leisure time activities, such as restaurants, clubs theatres, restaurants, and the similar. Demand Density Another aspect of occasion segmentation is the measurement of overall market characteristics by day-parts. This is the income density by day, day per week as well as monthly, weekly and even seasonally. This is crucial data when casinos want to lessen any higher than normal fluctuations which could be observed between a slow Monday morning and a busy Saturday night, or have extreme seasonal fluctuations. By dividing markets according to their demand patterns to gain a better understanding, it is possible to be gained of which amenities can be used to help strengthen slow demand periods, and those that may just add to already high-volume peak demand. Many expansion programs often fall into the trap of constructing extra amenities like luxury restaurants and lodging elements according to the highest demand periods. As a result, the net effect of costs & expenses for these investments can negate any contribution they make to the increase in gaming revenue. However, "fill-in" markets are the most efficient means to boost revenues overall 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 of utilizing occasion-segmentation is its ability to also indicate the potential impact certain amenities have on "impelling" visitation. While gravity models analyze the spending patterns associated with casinos of a given market area however, they are not able to measure the influence of non-gaming driven activities that could nonetheless generate casino traffic. Relevant data on the use of restaurants by the general public entertainment, entertainment, and weekend getaways often form the foundation on the basis of which amenities are designed to appeal to these segments and, in turn increasing the number of visitors. Although many of these people might not or do not visit the casino however, their exposure to the opportunity may hasten their use in addition to creating an additional source of income. In addition, when we look at an Las Vegas paradigm, more and more resorts are generating at least more than gaming revenues. This is because their hotels and restaurants are less and less subsidized, and together with their increasing retail components make a significant contribution towards the overall bottom line. Program Development After having a solid understanding of the market dynamics as well as the facility's market share/penetration rates in relation to the competitive mix and also the overall usage in the market. A matrix could be developed that sets both the demands and the supplies. This will help identify areas with unmet demand or supply issues, which serves as the springboard for the creation of suitable amenities, expansion and upgrade criteria & strategies. Impact Criteria In essence, there are two kinds of upgrade strategies which are profit-centers and subsidized. Subsidized elements could include adding and/or upgrading facilities that further increase current gaming market penetration/shares which will have a direct impact on increasing casino revenues Profit centers are specifically designed to boost patrons' current patterns of patronage by offering additional spending possibilities, as well as having direct impact on gaming activity. While many of the more traditional amenities, such as restaurants, hotels, retail shops, entertainment facilities and recreational facilities belong to one or both of these categories. However, it's essential to differentiate between them, so as to clearly establish the design/development criteria. Upgrading/Expansion As has been previously discussed, Las Vegas continually seeks to reinvent its own model to increase repeat visitation, that in itself creates a snowballing affect as each venue must keep-up with the other venues. To some extent upgrading programs, such as giving a brand new and more modern design, functions like an insurance policy against revenue loss, but do not necessarily relate to any incremental growth per se. It is not to be confused with the replacement of worn carpeting and recycling of slot machines the upgrade plan should try to generate excitement for the facility in terms of design, ambiance, materials, layouts, as well as overall décor. Expansion of the capacity of existing units is not a result of market analysis but rather it is a matter of "making hay while the sun shines," basing it on knowing the density of visits. Patron back-ups for restaurants and gaming tables could be good or bad, based on the time they occur and how often. The highest per-position daily net win numbers aren't always a sign of a successful casino because they can also indicate missed opportunities due to insufficient games. On the other hand, additional positions are not always going to produce the same results. When initially configuring capacities for the new facility, it is important to analyze the demand patterns into their respective component parts during the day, which will ensure maximum penetration during the peak periods and reduce inefficiency - the point at which the cost for additional capacity are overshadowed by the net profit potential.  

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