Casino Reinvestment and Expansion

Proper care and feeding for the Golden Goose

With the emerging trend of economic decline across a wide range of consumption, the casinos are facing a unique challenge in addressing how they can maintain their the profitability of their operations while remaining competitive. This issue is made even more difficult in the commercial gaming industry with increasing tax rates, as well as within the Indian gaming sector , by self imposed contributions to tribal general funds, as well as per capita distributions in addition to a growing trend in taxes imposed by the government.

The process of determining how much to “render unto Caesar,” while securing the required funds to maintain market share, grow market penetration and improve profits, is a challenging task that needs to be carefully planned and carried out.

It is in this context and in the writer’s view that involves grade and time-tested knowledge of the creation and management of these types of investments this article provides methods in which to plan and prioritize a casino reinvestment strategy. Visit:-

Cooked Goose

Although it seems axiomatic for a goose to not be cooked who lays golden eggs, it is remarkable how little consideration is often given to its ongoing treatment and nutrition. In the case of an exciting new casino, the developers, tribal councils, investors and financiers are naturally keen to reap the rewards and there is a tendency not to allocate enough of the profits towards maintaining and enhancing the assets. Thereby begging the question of just how much of the profits should go to reinvestment, and towards what goals.

As each casino project has its own unique set of circumstances There aren’t any hard and fast guidelines. Most of the time there are a lot of major commercial casino operators do not pay net profits in dividends to their stockholders, but rather reinvest the profits in improving the existing casinos while seeking new locations. Certain programmes are also supported by additional equity or debt offerings. The lowered tax rates for corporate dividends could alter the focus of these funding methods and will not affect the fundamental business prudence of continuing investing.
Profit Allocation

In the aggregate before the current economic crisis, public companies had a net profit ratio (earnings before income tax and depreciation) that was on average 25% of the income after the deduction of tax on revenue and interest payments. On average, close to two-thirds of the remaining profits are used for investing in assets and for replacement.

Casinos operating in low gross gaming tax rate jurisdictions are more readily able to make investments in their properties which in turn increases revenues that will ultimately increase those who pay taxes. New Jersey is a good example, as it mandates certain reinvestment allocationsin order to act as an income stimulant. Other states, such as Illinois and Indiana with higher effective rates, run the risk of delaying the amount of investment that could eventually reduce the ability of the casinos to boost market penetration in particular as neighboring states become more competitive. Furthermore, a well-run management system can generate higher available profit to invest, which is a result of the efficiency of operations as well as favorable equity and loan offerings.

The way a casino company decides to allocate its casino profits is an essential element to determine its viability long-term and should be an essential part of the initial strategy. Although loan amortization programs that are short-term or prepayment schemes may initially seem desirable so as to be able to get out of being in debt however, they also drastically reduce the ability to reinvest/expand quickly. This is also true for any profit distribution either to investors or, in the case of Indian gaming projects, distributions to a tribe’s general fund for infrastructure/per capita payments.

Moreover, many lenders make the error of requiring too much reserves for debt service and placing restrictions on reinvestment as well as further leverage , which could severely hinder a particular project’s ability to keep its competitiveness intact and/or take advantage of opportunities.

While we do not advocate that all profits should be reinvested to the business, we are encouraging the consideration of an allocation program that is based on the “real” costs of maintaining the asset, and maximizes the impact of this program.

Establishing Priorities

There are three aspects of the capital allocation that must be considered, as demonstrated below, and in order of priority.

1. Maintenance and replacement
2. Cost Savings
3. Revenue Enhancement/Growth

The first two areas are quite easy to grasp because they have a direct affect on maintaining market positioning and increasing profitability. On the other hand the third is more challenging in that it is greater of an indirect effect which requires an knowledge of the dynamics of markets as well as a higher level of risk for investment. All aspects that are herewith discussed further.

Maintenance and Replacement

Maintenance and Replacement plans should be an integral part of the casino’s annual budget, which represents a fixed reserve that is based on projected replacement costs of furniture, fixture equipment, buildings, systems and landscaping. It is not uncommon to receive annual lists of wishes that are not correlated with the actual wear & wear of these things. It is therefore essential to actually schedule the replacement cycle, allocating funds that do not necessarily have to actually be incurred in the year of accumulation. In the initial phase, it may not seem necessary to spend any money to replace brand new items, however, by making sure that the funds are saved for their eventual recycling will ensure that there is no need to hunt for the funds in times when they are most needed.

One of the areas that warrants special attention is slot machines, whose replacement cycle has been shortening lately, since newer technology and games are being developed at a much higher rate and in line with what competition dictates.

Cost Savings

Investment in cost savings programs and systems are, by their very nature and should be considered an investment that is less risky profits-allocation funds than any other investment. These can typically take the form of innovative efficient energy systems and products that reduce labor costs and more effective purchasing intermediation, and even interest reductions.

They come with a few caveats One of them is to analyze the claimed benefits against your particular use, as frequently products’ claims are overstated. Lease buy-outs as well as long-term prepayments for debt can be advantageous, particularly when they were entered into during the initial stages of development and equity funds may have been not available. In these cases it is crucial to analyze the effect of this strategy on the bottom line, in relation to other possible uses of the monies to boost revenue or invest in growth.

A recent trend is the growing popularity of cashless slot machines that not only offer workers with a lower cost for fills, counts and hand-pays, but also serve as an aid for players who do not want to carry around cumbersome coin buckets, while also encouraging the use of multiple games.
Revenue Enhancing & Growth

Leveraging is the most important driving force behind any growth/revenue related investment. It includes the following:

o Patronage Base
Available Funds
O Lands
• Marketing Clout
Management Experience

The idea is to maximize the use of the available assets to increase revenues & profitability. Typical examples include increasing base patronage spending, and expanding the trading area by providing additional products/services, such as retail stores, entertainment alternatives like leisure or recreational amenities and overnight accommodation, as well as more restaurant choices, and obviously, increased gaming.

Master Plan

The anticipation of future expansion and growth needs to be fully included in the initial master planning process to make it will ensure the seamless integration of the various elements of a phased-in programme and also allows for the minimum amount of interruption to operations. 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 expansion or enhancement plan we recommend taking a step back and reviewing the present position of the property compared to the market and competition. As we have observed in a variety of gaming jurisdictions across the US, often casinos that have been operating “fat and happy” for a few years, find themselves in a period of no growth. Sometimes this is due to competition arising from either/both new local area casinos or regional locations that have the affect of reducing patronage from peripheral area markets. Also, the current clients may be bored of their experiences and want to move on to better pastures. The long-standing growth of the Las Vegas strip is testament to the effectiveness of constantly “reinventing” oneself.

Our approach to market research is initially centered on determining which the current facility is reaching out to the potential market, and also in relation to any competitive market shares. This typically involves an analysis of the current patronage base based on information gleaned from the player tracker database, as well as mailing lists, as well as day-part, daily, weekly, annual and seasonal revenue trends.

The information is then correlated and analyzed in relation to the potential market for the facility to reveal what extent certain market segments are using the facility and the requirements it fulfills. What is even more important is that this type of analysis will indicate those market segments that are not taking advantage of the facility more, and why.

Occasion Segmentation

As our own studies have found, the markets for casino are separated by various aspects of occasioned-use that also include typical spending & visitation patterns. The traditional methods of market measurement, such as gravity models, usually only take into account the demographics of a population with respect to the revenues that are generated in similar markets. However, a segmentation of events market analysis gives more specific information about the causes for a visit to a gambling establishment as well as how they relate to the benefit sought, and the degree of the occasion’s influence on the average amount of money spent and frequency of visits. This type or data mining process is far better than gravity models in that it could help determine the type of facilities and positioning strategies necessary to attract every market segment, by assessing their respective contribution to overall potential. The technique has been used successfully in the restaurant business as well as other industries that provide leisure time services particularly amid an expanding supply/demand marketplace.

Perhaps even more importantly taking a look at it from an occasioned-use standpoint, you can observe the size and character of the underling competition, that, in many cases not only includes other casinos, as well as other entertainment and leisure time activities, such as restaurants, clubs theaters, etc. like.

Demand Density

Another significant aspect of segmentation is in measuring the overall market characteristics of day-parts. That is, revenue density based on time of day, day per week as well as monthly, weekly as well as seasonally. This is particularly important when casinos want to reduce any greater than normal fluctuations that may occur between a slow Monday morning and an incredibly busy Saturday night; or experience severe seasonal variations.

When markets are segmented based on their patterns of demand to gain a better understanding, it is possible to be gained of which amenities can help boost weak demand periods, as well as the ones that can simply add to the already high-volume peak demand.

Many expansion programs often fail to account for the additional facilities like high-end hotels and restaurants based on the peak demand times. As a result, the effect of the cost and expenses for these investments could negate any contribution they make to the increase in gaming revenues. Rather, “fill-in” markets are the most effective way to boost overall revenue since they use 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 examine the characteristics of gambling-related spending for a certain market however, they are not able to measure the impact of non-gaming driven activities that could nevertheless generate casino traffic.

Relevant data on the use of restaurants by the general public entertainment, entertainment and weekend getaways often form the foundation on which to focus amenities designed to serve these markets; and by so doing increasing the number of visitors. While many of these customers might or may not use casinos and their exposure to this opportunity may hasten their use as well as creating an additional profit center.

In addition, when we look at the Las Vegas paradigm, more and more resorts are generating at least more than gaming revenues. This is because their hotels and restaurants are less & less subsidized, and together with their growing retail element are a major contributor in the final line.

Program Development

After having a solid understanding of the market’s dynamics as well as the current market shares/penetration rate in relation to the competitive mix, and the general usage in the market. A market matrix can be developed that sets both the demands and the supplies. This is a method to determine areas with unmet demand and/or over supply, that is the basis for the development of appropriate facilities, upgrades and expansion requirements and strategies.

Impact Criteria

The basic idea is that there are two kinds of strategies for expansion and upgrade that are subsidized and profit-centers. Subsidized components could include adding and/or upgrading amenities that will further widen the current market share of gaming which will have a direct impact on increasing casino revenues Profit centers are intended to leverage patrons’ current patterns of patronage by offering additional spending opportunities, and having an in-direct effect on the gaming activities. While many of the traditional facilities, like hotels, restaurants, establishments, entertainment venues, and recreational facilities belong to one or both of these categories. However, it’s important to identify the difference so that you can be able to clearly define the criteria for design and development.


As was previously stated, Las Vegas continually seeks to reinvent its own model to increase repeat visitation, which, in turn, creates an effect of snowballing because each venue must keep-up with its counterparts. In a way, upgrading programs, which may involve giving a brand new and more modern appearance, works like an insurance policy to protect declining revenues. They do not necessarily correlate to increases in revenues per se. Not to be mistaken for replacement programs of worn carpeting and recycling of slot machines, upgrades should attempt to generate excitement for the facility in terms of atmosphere, the quality of designs, finishes, and overall decor.

The expansion of capacity already in place is not a result of market analysis and more a function of “making hay while the sun shines,” in the context of an understanding of visitation pattern densities. Patron back-ups for table games and gaming positions can be good or bad, depending on when they occur and how often. High per position per day net win averages are not always a sign of a successful casino because they may also signify missed opportunities due to insufficient games. In contrast, more positions do not always yield the same numbers.

In the beginning, when determining capacities for the new facility, it is important to evaluate the demand patterns and their parts of the day that will allow for maximum penetration during the peak periods and reduce inefficiency – the point where the costs of additional capacity are overshadowed by the net profit potential.


Leave a Reply

Your email address will not be published. Required fields are marked *