Proper Feeding and Care of the Golden Goose
With the emerging paradigm of declining economic conditions across a wide range of consumer spending, casinos are facing an unique problem in determining how they both maintain the profitability of their operations while remaining competitive. These factors are further complicated in the gaming industry as tax rates rise, as well as within the Indian gaming sector , by self-imposed contributions to tribal general funds and/or per capita distributions, and a growing trend in fee-based taxes that are imposed by states.
Determining how much to “render unto Caesar,” while securing the required funds to ensure market share, grow market penetration and improve profitability, is a daunting task that needs to be carefully designed and executed. Visit:- https://mspuiyi88.com/
It is within this context and the author’s perspective that has graded and time-on experience in the design and management of these types of investments, the article offers suggestions to design and prioritize an investment strategy for casino reinvestment.
Although it seems axiomatic not to cook the goose that laid the golden eggs, it is amazing how little thought is often paid to its regular maintenance and food. With the opening of the new casino, tribal councils, investors , and financiers are naturally keen to reap the benefits and it is common not to put a significant portion of profits to maintenance and improvement of the asset. Thereby begging the question of just how much of the profits should be allocated to investing in the future, and what goals.
Inasmuch as each project has specific situation there aren’t any hard and fast rules. In the majority of cases, many of the major operators of commercial casinos don’t distribute net profits as dividends to stockholders, but rather reinvest these profits into improving their existing facilities while seeking new locations. Some of these programs are also supported by additional capital instruments, such as equity stock offerings. Tax rates that are lower for corporate dividends could alter the focus of these funding methods and will not affect the business prudence that is fundamental to continuing replenishment.
As a whole and prior to present economic climate, companies that are publicly owned were operating with a ratio of net profits (earnings before income tax and depreciation) that was on average 25% of income after the deduction of total revenue tax and interest payments. On average, close to two thirds of the remaining earnings are used to fund investment and replacement of assets.
Casino operations in low tax rates on gaming are more readily able to make investments in their properties which in turn increases revenues that ultimately help the tax base. New Jersey is a good instance, as it requires certain reinvestment allocations, as an income stimulant. Other states, such as Illinois and Indiana that have higher effective rates, are at the risk of decreasing reinvestment that may eventually erode the ability of the casinos to grow market demand penetrations and, in particular, as neighboring states get more competitive. Moreover, effective management can increase the amount of profit available to reinvest, resulting from the efficiency of operations as well as favorable equity and loan offerings.
The method by which a casino corporation decides how to spend its casino profits is a critical element in determining its viability over the long term, and should be an essential part of the initial strategy. Although short-term loan amortization or debt prepayment schemes may initially appear appealing to swiftly come out being in debt however, they also drastically reduce the ability to reinvest/expand quickly. This is the case for any distribution of profits for investors or, in the instance of Indian gaming , distributions to the tribe’s general fund for infrastructure/per capita payments.
Moreover, many lenders make the error of requiring too much reserves for debt service, and also putting restrictions on reinvestment as well as further leverage , which could severely limit a given project’s ability to stay competitive and/or make the most of available opportunities.
We aren’t advocating that all profits be reinvested to the business We encourage the consideration of an allocation system that takes into account all the “real” costs of maintaining the asset as well as maximizing the impact.
There are three essential areas of capital allocation that should be considered, as demonstrated 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 a direct affect on market positioning and enhancing profitability. However, the third is somewhat challenging in that it is greater of an indirect affect that requires a thorough knowledge of the dynamics of markets and greater investment risk. These three aspects are will be discussed in detail.
Maintenance and Replacement
Maintenance & Replacement provisions should be a routine part of the annual budget of the casino, which represents a fixed reserve that is based on projected replacement costs for furniture, fixtures, equipment, building, systems, and landscaping. However, we often see annual wish lists which do not correspond to the actual wear and wear and tear of these objects. It is therefore crucial to plan the replacement cycle, allocating money that does not have to actually be incurred in the year of accumulation. In the initial phase, it might not be appropriate to spend money on the replacement of brand-new assets, but by making sure that the funds are saved for eventual recycling, the company will mean that you do not have to search to find the funds when they are needed most.
One area of special consideration is the slot machines, whose replacement cycles have been slashing lately, since newer technologies and games are evolving at a faster rate and in line with what competition dictates.
The cost savings plans Systems and cost savings programs are by their very nature and when properly researched, an investment that is less risky profit allocation funding then almost any other investment. They can be in the form of brand new energy saving systems as well as products that save labor, more efficient purchasing intermediation, and interest reductions.
There are some caveats to these products One of them is to examine their advertised savings in relation to your personal application, since often the product claims are exaggerated. Lease buy-outs, as well as long-term prepayments for debt can be advantageous, especially when the contracts were signed during the development stage when equity funds could have been insufficient. In these cases it is crucial to consider this strategy’s net effect in the end, as compared to alternative uses of the monies to invest in growth or revenue-enhancing investments.
A recent trend is the rising popularity of cashless slot systems, which not only provide labor savings for fills counting, hand-pays and fills but also act as an aid to customers who don’t want to carry around the heavy buckets of coins, while encouraging multi-game play.
Revenue Enhancing & Growth
Leveraging is the most important catalyst of any revenue enhancing/growth related investment. It includes:
o Patronage Base
o Funds Available
A Marketing Clout
O Management Experience
The principle is to make the potential of an asset to generate more revenue & profitability. Examples of this include increasing the average patronage base spending and widening the effective trading range by offering additional products/services, such as retail stores, entertainment alternatives, recreational/leisure amenities and overnight accommodation, as well as more eateries and, of course, expanded gaming.
Future expansion and growth needs to be fully integrated into the project’s initial master plan so that it can ensure a cohesive integration of the various aspects of a planned-in phase as well as allowing for the least amount of operational interruption. It’s often not possible to anticipate market changes thus expansion options have to be carefully considered.
The Big Picture
Before beginning any type of expansion or enhancement plan it is recommended to take a step back and taking a look at your property’s current position in relation to the competitive landscape. We’ve observed that in many gaming jurisdictions across the US, often casinos that were operating “fat and happy” for several years find themselves in a stagnant period. Sometimes this is due to competition stemming from either/both new local area casinos or regional locations that reduce patronage from peripheral area markets. Additionally, the current clients may be bored of their experiences and are seeking greener pastures. The long-standing growth of the Las Vegas strip is testament to the success of continually “reinventing” oneself.
Our approach to market studies is primarily based on determining the extent to the present facility is reaching out to the potential market and in relation to market share of competitors. This typically involves an analysis of the present patronage base based on information obtained from the player tracking data base, and mailing lists, in conjunction with day-part weekly, daily, monthly and seasonal revenue trends.
The information is then correlated and analyzed in relation to the market potential to indicate the extent to which market segments are using the facility as well as the requirements it can meet. But what is more important is that this kind of analysis will reveal market segments that are not making use of the facility in a more comprehensive manner and what the reasons are.
Our own research has found, the markets for casino are divided by different characteristics of use-on-occasion, which also includes frequent visits and spending patterns. The traditional methods of market analysis, which includes gravity models, generally weigh the demographic characteristics of a population using revenues from similar markets. However, an occasion segmentation market analysis offers more precise information about the causes driving a casino visit as well as how they relate to the advantages sought, and the degree that the event determines the average amount of money spent and frequency of visits. This kind of data mining is far more effective than gravity modeling, in that it can help determine the type of services and positioning strategies that are required to draw each market segment, by measuring their contribution to the global potential. The method is being used successfully in the restaurant industry and other leisure and leisure service industries particularly amid an expanding demand and supply market.
And perhaps more importantly when looking at this market through an occasioned-use perspective, reveals the extent and the nature of the competition. It does, often, does not just contain other casinos but also other entertainment options and leisure activities like clubs, restaurants theaters, etc. like.
Another aspect of occasion segmentation is the measurement of general market characteristics by day-parts. That is, income density by day, day per week, weekly, monthly as well as seasonally. This is particularly important when casinos are trying to limit any more than normal fluctuations that may occur between a slow Monday morning and a packed Saturday night or experience severe seasonal variations.
By segmenting markets by their patterns of demand to gain a better understanding, it is possible to be obtained of which facilities could help to boost the low demand times, and ones that will only add to the already high-level demand peaks.
Many expansion plans make the mistake of configuring extra amenities like luxury accommodations and restaurants according to the highest demand times. This means that the total effect of the costs and expenses for these investments can negate any contribution they might make to increasing gaming revenue. Instead, “fill-in” markets are the most effective means to increase overall revenues, because they make use of existing capacity. 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 casino related spending characteristics of a specific market but they cannot quantify the effect of non-gaming related activities that can nevertheless generate casino traffic.
Relevant data on the people’s frequent use of restaurants entertainment, entertainment and weekends away can form the basis upon which to focus amenities designed to cater to these markets and in doing so they can boost the amount of visits. Whereas many of these patrons could or might not be using casinos and their exposure to this potential of the casino could encourage their use, while also creating an additional profit center.
If we take a look back at towards the Las Vegas paradigm, more and more strip properties are now generating more, if not more than gaming revenues; as their restaurants and hotels are less & less subsidized, and with their growing retail element make a significant contribution to the bottom line.
After having a solid understanding of the market’s dynamics as well as the facility’s market share/penetration rates in relation to the competitive mix and the overall occasioned-use of the market, a market matrix can be developed that sets both the demands and the supplies. This function seeks to identify areas that are not being met demand or areas of over-supply that serves as the springboard for the development of appropriate amenities, upgrades, and expansion requirements and strategies.
There are two kinds of upgrades and expansion strategies that are subsidized and profit-centers. Subsidized elements could include the addition of or upgrading of facilities that further increase the market for gaming and share that will consequently have an immediate effect on the growing revenues of casinos and profit centers are designed to further leverage current patronage patterns with additional spending possibilities, as well as having an indirect effect on the gaming activities. Although many of the more typical amenities like restaurants, hotels, retail shops, entertainment venues and recreation facilities may be included in one or both of these categories. It is essential to differentiate between them in order to clearly define the design/development requirements.
As was previously stated, Las Vegas continually seeks to reinvent its own model to boost repeat visits, which can result in a snowballing affect as every venue has to keep up with its neighbors. Somewhat, upgrading programs, such as the creation of a fresh and new look, is a lot similar to an insurance plan for slipping revenues, and do not necessarily relate to any increases in revenues per se. While not meant to be interpreted as replacing carpets that are worn and slot machine recycling, the upgrade plan should try to bring new energy into the facility in terms of design, ambiance, materials, layouts, as well as overall decor.
Expansion of existing capacity is less a function of market analysis, and more an act to “making hay while the sun shines,” in the context of knowing the patterns of visitation. Backups from patrons for restaurants and gaming tables could be good or bad, based on the time they happen and the frequency at which they occur. High per position per day net win averages are not always a sign of a flourishing casino because they can also indicate missed opportunities due to the insufficient amount of games. On the other hand, additional positions won’t always generate the same averages.
When setting up capacities for a new facility, it is essential to analyze the demand patterns and their parts of the day that will allow for maximum capacity during peak times and reduce inefficiency – the point at which the cost associated with the expansion of capacity is greater than its net income potential.