Proper Feeding and Care of the Golden Goose
In the current system of declining economic conditions in a variety in consumer expenditure, gambling establishments face particular challenges in determining how they both maintain profits while remaining competitive. These issues are made more complicated in the commercial gaming industry as tax rates rise, and within the Indian gaming industry, due to self-imposed tribal contributions to general funds and/or per capita distributions in addition to a growing trend in fee-based taxes that are imposed by states.
The process of determining how the amount of money to “render unto Caesar,” while securing the required funds to keep market share, increase market penetration , and increase profitability, is a daunting job that has to be properly thought out and executed.
It is in this setting and the author’s perspective that involves grade and time-tested knowledge of the creation and management of these kinds of investments, this article provides methods to design and prioritize the casino reinvestment strategy.
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When the new casino, tribal councils, investors and financiers are eager to reap the rewards . However, it is common not to put a significant portion of the money to the maintenance and enhancement of assets. Thus, begging the question what percentage of profits should be allocated to the reinvestment process, and to the goals.
In the sense that each project comes with their own set of circumstances, there are no hard and speedy guidelines. For the most part most of the major casino operators do not pay net profits as dividends to stockholders, but rather reinvest them into improvements to their existing facilities while seeking new locations. Some such programs also funded through additional equity or debt offerings. The lower tax rates on corporate dividends are likely to alter the focus on these methods of financing however, they must still maintain the prudence and prudence in business that comes from ongoing investing.
Collectively before the present economic climate, public companies were operating with a ratio of net profits (earnings prior to income taxes and depreciation) that is about 25% of income after deducting the income tax and interest. On average, almost two-thirds of the remaining profits are used for reinvestment and asset replacement.
Casinos operating in low tax rates on gaming are more readily able to return capital to their properties, which in turn increases revenues that can ultimately benefit the tax base. New Jersey is a good examplebecause it has a law that requires certain reinvestment allocationsin order to act as to boost revenue. Other states, like Illinois and Indiana with higher effective rates, are at the risk of delaying the amount of investment that could eventually reduce the casino’s ability to increase market penetration, especially as neighboring states get more competitive. Furthermore, a well-run management system can result in higher profits for reinvestment. This is due to both efficient operations and favorable equity and loan offerings.
How a casino enterprise decides to distribute its casino earnings is a crucial factor in determining its long-term viability and should be an integral part of the initial strategy. While loan amortization and debt prepayment schemes may initially appear desirable to swiftly come out under the obligation but they also limit the capacity to reinvest or expand on a timely basis. This is true in the case of any profit distributions, whether to investors or, in the case of Indian gaming , distributions to a tribe’s general fund to pay for infrastructure or per capita payments.
In addition, many lenders make the error of requiring too much reserve for debt service and putting restrictions on reinvestment as well as additional leverage that could seriously restrict a specific project’s ability to remain competitive and/or make the most of available opportunities.
Although we don’t advocate that all profits should be reinvested into the operation We encourage the consideration of an allocation plan that considers what are the “real” costs of maintaining the asset as well as maximizing the impact of this program.
There are three key areas of capital allocation that need to be considered, as illustrated below and in order of priority.
1. Maintenance and Replacement
2. Cost Savings
3. Revenue Enhancement/Growth
The first two aspects are quite easy to grasp, in that they have a direct affect on market positioning and enhancing profitability. However the third is more complicated in that it has more of an indirect influence which requires an understanding of the market dynamics as well as a higher level of risk for investment. All aspects that are herewith discussed further.
Maintenance & Replacement
Maintenance and Replacement plans should be a regular function of the casino’s annual budget that is a reserve that is based on projected replacement costs of fixtures, furniture equipment, building systems and landscaping. It is not uncommon to receive annual lists of wishes which do not correspond to the actual wear & wear of these items. It is therefore essential to properly plan the replacement schedule, and allocate funds that don’t have to actually be incurred during the year of accrual. In the beginning, it might not be necessary to spend any money for the replacement of brand new assets, but by the accumulation of funds that are reserved for recycling purposes, it will mean that you do not have to search for funds at times when they are needed most.
One particular area to be considered is the slot machine, whose the replacement time has been shorter in recent times, as more modern games and technologies are being developed at a faster rate as competition dictates.
Investments in cost savings programs & systems are, by their very nature and should be considered more secure use of profit allocation than nearly any other investment. These items can often take the form of innovative energy saving systems or products for labor savings as well as more efficient buying intermediation, and interest reductions.
There are some caveats to these products and one of them is to carefully analyze their claimed savings against your own particular application, as often times 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 obligations were entered into during the development stage when equity funds may have been limited. In these situations, it’s crucial to consider this strategy’s net effect for the business’s bottom line in comparison with alternative applications of the funds to boost revenue or invest in growth.
One recent trend is the rising popularity of cash-less slot systems that not only offer labor savings for fills count and hand-pays they also provide an aid to those who aren’t keen to carry around the heavy coin buckets, while also encouraging multi-game play.
Revenue Enhancing & Growth
Leveraging is the most important driving force behind any growth/revenue related investment. It includes:
o Patronage Base
o Available Funds
O Marketing Clout
The idea is to maximize the power of the assets to increase revenues and profit. Common examples include increasing consumption of base patronage and expanding the trading range by offering additional items or services, such as retail stores, entertainment alternatives recreation and leisure facilities including overnight accommodation, more restaurant choices, and of course, expanding gaming.
Anticipation of potential expansion and growth needs to be integrated into the initial master plan so that it assure cohesive implementation of all the components of a phased-in plan as well as allowing for the minimum amount of interruption to operations. It’s often not possible to anticipate market changes which is why expansion options should be considered in detail.
The Big Picture
Before embarking on any kind of improvement or expansion plan, we strongly recommend first stepping back and reviewing your property’s current position in relation to the competitive environment. As we’ve seen in a variety of gaming jurisdictions across the country, often , casino ventures that were operating “fat and happy” for a few years, find themselves in a stagnant period. Sometimes this is due to competition from local area casinos or regional locations that reduce patronage from peripheral area markets. Furthermore, the existing customers may get bored with their experience and seek out new opportunities. The growth history of the Las Vegas strip is testament to the success of continually “reinventing” oneself.
Our approach to these market studies is initially focused on determining the degree to the present facility is penetrating the potential market and in relationship to market share of competitors. It is typically an analysis of the current patronage base using data gathered from the player database for tracking and mailing lists, coupled with day-part daily, weekly, monthly and seasonal revenue trends.
The information is then correlated by a review of overall market potential to indicate how much market segments are utilizing the facility as well as the requirements it meets. What is even more important is that this type of analysis will identify markets that aren’t taking advantage of the facility more and also the reason for that.
Our own research has found, the markets for casino are separated by various aspects of event-based use, as well as regular patterns of spending and visitation. The traditional methods of market measurements, including gravity models, usually only weigh the demographic characteristics of a specific population by comparing revenues in similar markets. However, an occasion segmentation market analysis offers more precise details about the factors for a visit to a gambling establishment, how they relate to the advantages desired, and the extent to which the occasion determines the frequency of visitation and average spending. This kind analysis of information mining can be more effective than gravity modeling, in that it can aid in determining the types of infrastructure and positioning strategies required to attract every market segment by evaluating their contribution to the overall potential. The method has been used successfully in the restaurant business and other leisure time service industries particularly in the context of a growing demand and supply market.
And perhaps more importantly considering it from an event-based viewpoint, shows the magnitude and characteristics of the underling competition, that, in many instances, doesn’t just include other casinos, however, also other entertainment and leisure-time activities like restaurants, clubs theaters, and the like.
Another important aspect of occasion segmentation is in measuring overall market characteristics by day-parts, that is revenue density by time of day, day per week, weekly, monthly and seasonalally. This is especially important data when casino venues are seeking to lessen any higher than normal fluctuations that may occur between a quiet Monday morning and a crowded Saturday night or experience severe seasonal variations.
By dividing markets according to their patterns of demand in this way, a better understanding could be gained on which amenities can be used to help strengthen weak demand periods, and the ones that can be detrimental to already high-volume peak periods.
Many expansion programs tend to make the mistake of configuring additional amenities such as high-end hotels and restaurants in accordance with peak demand periods. Therefore, the effect of the cost and expenses associated with these investments could negate any contribution they could make to a rise in gaming revenues. Instead, “fill-in” markets are the most effective way to increase overall revenues, 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 characteristics of gambling-related spending of a specific market but they cannot quantify the effect of other activities not based on gaming that might nonetheless generate casino traffic.
Relevant data on the use of restaurants by the general public entertainment, entertainment, and weekend getaways can often form the basis upon what to target the amenities to cater to these markets and, in turn it can increase the amount of people visiting. Although many of these people could or might not be using the casino however, their exposure to the opportunity may hasten their use and create an additional revenue source.
If we take a look back at an Las Vegas paradigm, more and more resorts are producing more, if not more than gaming revenues. This is because their hotels and restaurants are less and less subsidized, and together with their growing retail element, represent strong contributors towards the overall bottom line.
When you have a good understanding of the market dynamics that are affecting the market, both in terms of the facility’s market share/penetration rates in relation to the competitive mix and also the overall usage in the market. A matrix can be created that sets both the demands and the supplies. This function seeks to identify areas that are not being met demand or supply issues, which provides the basis for the creation of suitable amenities, upgrades, and expansion strategy and criteria.
There are two kinds of strategies for expansion and upgrade that are subsidized and profit-centers. Subsidized components could include adding or improving amenities that will further widen the share of the gaming market, thusly having a direct influence on the growth of casino revenues Profit centers are designed to increase patrons’ current patterns of patronage by offering additional spending possibilities, as well as having an indirect effect on the gaming activities. Although many of the conventional amenities, such as hotels, restaurants, retail establishments, entertainment venues, and leisure facilities could fall into one or both of these categories. However, it’s essential to differentiate between them, so as to clear the development and design criteria.
As previously mentioned, Las Vegas continually seeks to improve its own model to attract more repeat visitors. which can result in an effect of snowballing because each location must stay on top of its neighbor. Upgrading programs, which could include making a fresh and modern design, functions like an insurance policy against slipping revenues, and do not necessarily correspond with any incremental growth per se. While not meant to be interpreted as replacement programs of worn carpeting and recycling of slot machines the upgrade plan should try to bring new energy into the building in terms of ambiance, quality of designs, finishes, and overall décor.
The expansion of capacity already in place is less a function of market analysis, and more an act that of “making hay while the sun shines,” basing it on knowing the patterns of visitation. Backups from patrons for restaurants and gaming tables are both good and bad, based on when they occur and how often. In the case of high per position daily net wins aren’t necessarily indicative of a prospering casino, because they can also indicate missed opportunities due to insufficient games. However, more players are not always going to yield the same numbers.
In the beginning, when determining capacities for an upcoming facility, it is essential to fully evaluate the demand patterns and their parts of the day that will allow for maximum capacity during peak times while minimizing inefficiency – when the price associated with additional capacity is overshadowed by the net profit potential.