Casino Enterprise Management

T­here are many economies at play in the world of gaming. We all expect the global, national and regional economy to impact the health of the casino business, but there are many factors to be considered from both the micro and macro perspectives.

With new gaming jurisdictions opening up or expanding, there’s bound to be an impact not just on regional and national markets, but also on suppliers of goods and services used by casinos. And as new technologies become available, how does it impact player preference and behaviors?

Player preferences can often be impacted by the household economy that has fewer disposable dollars to spend on entertainment. Further, player behaviors can be impacted by things the public sees or perceives seeing in the global, national and regional economies. So how has the current difficult economy and political turmoil affected gaming psychology? What might be necessary to re-establish a rebound to traditional player behaviors?

With economics all around us, and particularly evident as we recover from the Great Recession, Casino Enterprise Management turned to some of the top experts on the topic to share with us their thoughts. Read on to see what these professors and market analysts have to say, as they tackle topics such as history, problem gambling, public policy, regulation, revenues, markets and more.


Mega-Casinos Everywhere? The Next Wave of U.S. Gaming Expansion
Clyde W. Barrow, Ph.D.
Director
Center for Policy Analysis, University of Massachusetts Dartmouth

The Great Recession (2007-2009) is seen as a period of retrenchment in the U.S. casino industry—mainly because of declining aggregate gross gaming revenue (GGR)—but it also induced a major expansion of casino gaming that has been ignored by most analysts. During the Great Recession, Delaware authorized table games at its three racetrack casinos and restarted a sports lottery. West Virginia authorized table games at its four racetrack casinos, while adding a fifth gaming venue. Pennsylvania authorized table games at its nine slot parlors, while adding a casino in Philadelphia. Maryland opened its first racetrack casino; Kansas opened its first commercial casino; and Mississippi added two new casinos. Colorado authorized new table games at its 37 limited stakes casinos and increased the maximum allowable bet from $5 to $100. Rhode Island authorized 24-hour gaming at its two slot parlors, while Maine, Ohio and Massachusetts collectively authorized eight resort casinos and a slot parlor that will be opening over the next one to three years. Even Atlantic City is now poised to open its 12th casino in 2012, while Florida and New York officials are discussing the possibility of mega-resort casinos in Miami and New York City.

The continued expansion of the U.S. casino industry has introduced a new level of competitive pressure on gaming facilities, and the increased competition is leading to a major change in state gaming policies, primarily a shift from export policies to recapture strategies and a shift from short-term revenue generation (fiscal policy) to long-term job creation (economic development policy) as the focus of casino development. Since 1989, 20 states have legalized casino gaming and by 2010, there were 216 casinos of various types operating in these non-traditional venues.¹  Over the last 20 years, nearly 82 percent of the increase in casino visitations has occurred in these non-traditional venues, which now account for 49 percent of casino GGR nationally.

In context of this rapid expansion of legalized gaming outside the traditional venues of Nevada and New Jersey, casino gambling emerged as an important facet of many states’ fiscal policies, especially when faced with the political constraints of the “tax revolt” that began in the 1980s. Most of the initial gaming expansion in the U.S. consisted of floating riverboats, dockside riverboats and slots-only racetrack casinos that required comparatively little capital investment and short start-up times, but they generated hefty tax revenues at high rates of taxation. During this expansion phase, state gaming policies focused primarily on the “export” potential of gaming, with the stated goal being to generate new tax revenue from spending by the residents of adjacent states.

However, as both commercial and Indian gaming has proliferated across the United States, the policy rationale for expanded gaming has shifted from capturing exports to “recapturing” the tax revenues being lost to adjacent states. At the same time, the magnitude of the Great Recession—most notably the number and duration of job losses—has shifted policymakers from a focus on revenue generation to job creation. Ohio, Maine and Massachusetts recently authorized the development of resort casinos, while at various points explicitly rejecting proposals for a number of racetrack casinos. The expanded gaming debates in Florida and New York are focused on mega-resorts with convention centers, retail shopping, gourmet dining and entertainment venues. This trend has ricocheted into the “racino states,” who are now trying to compete with resort casinos by authorizing 24-hour gaming, the introduction of table games and the addition of hotels at existing facilities, which will further intensify the demand for new capital investment in the casino industry.

1 American Gaming Association, 2011 State of the States: The AGA Survey of Casino Entertainment (Washington, D.C., 2010), p. 5.


The Economics of Casino Legalization
William R. Eadington
Professor of Economics
Director, Institute for the Study of Gambling and Commercial Gaming
Philip G. Satre Chair in Gaming Studies
University of Nevada, Reno

If one looks at the long history of legalization of casinos in societies at different times and in different places, there is a noticeable pattern. New casino jurisdictions have tended to be relatively impoverished, down on their luck or lacking other reasonable alternatives for economic improvement. As a result, they have often turned to exploiting gambling and other “vices” as development strategies to take advantage of prohibitions in neighboring jurisdictions.

Such jurisdictions have been more likely to introduce casino gaming as a means to attract capital and visitors, create jobs and otherwise shore up the fiscal difficulties for the authorizing government. The economic hardships they have incurred seems to make taking a higher moral position less attractive than rolling the dice to capture perceived potential economic benefits on the table.

In one way or another, this is a pattern seen Macau in 1847, shortly after the British had founded Hong Kong, which then captured the lion’s share of the China trade from Macau. It also occurred with Monaco in the 1850s and 1860s, when the financially strapped Grimaldi family employed François Blanc, among others, to develop a casino and spa as a way to bring income to that destitute principality.

In 1931, Nevada was suffering the ravages of the Depression, which had undermined the ranching and farming economies in that desolate state. Nevada’s legal casinos and quickie divorces were pragmatic expedients for a legislature with few other good choices at the time.

These patterns continued through the late 20th and into the 21st centuries, especially in the United States. Atlantic City in 1976 was a basket-case economy with few viable options besides casinos. It is also no accident that subsequent major waves of commercial casino legalization—between 1988 and 1993, and between 2008 to the present—corresponded with national economic recessions or periods of high unemployment where job creation, attracting capital investment and addressing state budgetary shortfalls were all placed at a premium. Many of the states that were important in the early bandwagon to legalize casinos—Mississippi, Louisiana, Iowa, South Dakota, Michigan—were either very low on the relative income scale, or were experiencing economic hard times in key industries when the time of decision for casinos was cast upon them.
Indian gaming also fits into the pattern. Tribal populations, especially those on reservation lands, have been among the poorest communities in America. Efforts to establish legal foundations for tribal gaming were driven in large part by the absence of viable economic alternatives for tribes. Debates within tribes whether or not to pursue casinos through the Indian Gaming Regulatory Act often centered on tradeoffs between economic benefits versus perceived social impacts, moral concerns, or inconsistencies with tribal values and traditions. For those tribes with the greatest potential economic gains, the debates have usually resulted in favor of casino development.

However, as gambling has continued to spread throughout the United States since 2000, the ability of states and tribes, and of other important economic actors (companies, states, other gaming revenue benefactors) to capture substantial economic benefits, or economic rents, has diminished. When casinos were legal in only a few jurisdictions, each geographically separated from others, the ability to capture economic rents in the form of extraordinary profits, high excise tax rates, or significant earmarks to declining industries (i.e., horse racing) or other worthy causes was substantial. As casinos and near-casinos, such as slots-only facilities and racinos, have spread to the majority of states, the ability to draw customers from far away has been seriously compromised. In particular, virtually all casinos now, with the exception of those on the Las Vegas Strip, draw the lion’s portion of their visitation and gaming revenues from local markets, living within a 100-mile radius of the facilities.

The legalization game has changed in a number of ways in the new millennium. Cross-border casino competition, coupled with the economic malaise brought about by declining industries or the Great Recession, has made it easier for legislatures, governors and the electorate to choose the pragmatism of legalization over the aesthetic ideal of continued prohibition in various states. This formula has applied to New York (2001), Pennsylvania (2004), Maryland (2008), Ohio (2009) and Massachusetts (2011), as well as liberalization of gaming constraints in Delaware, South Dakota and Pennsylvania. Current or ongoing debates in New York, Texas and Florida all have similar considerations.

Interestingly, the new candidates for legalization are not as destitute as were their predecessors. Also, the tactics to capture economic rents have changed since 2000. Effective tax rates in one group of newly authorized states are considerably higher than those of earlier adopters; Pennsylvania, Maryland and New York all have effective tax rates over 50 percent of gaming revenue. Another group of states has pursued the “Singapore” strategy of exclusive licenses with low or moderate tax rates to create higher expected returns on capital investments, coupled with competitive bid processes to capture economic rents for public benefit. Kansas (2007) and Massachusetts fit into this model, as might Florida if it goes forward with its 2011 casino legislation. In Ohio, sponsors of the 2008 ballot initiative did a good job of capturing economic rents for themselves and the state of Ohio with the combination of regional monopoly and moderate tax rates.

However, the continued removal of prohibitions and constraints on casino gaming is going to create many losers among the early benefactors of economic rents. This can already be seen in the declining demand for traditional destination casino markets such as Reno and South Lake Tahoe, Nev., and Atlantic City. It will likely become increasingly important for former regional monopoly casinos such as Foxwoods and Mohegan Sun.

Over time, with few exceptions, profit margins for casinos will be squeezed until only “normal” returns from invested capital can be expected. The major Darwinian component for survival of the fittest will increasingly be driven by the old lesson of “location, location, location.”


Economic Headwinds Continue to Impact Casino Spending
Andrew Zarnett
Research Analyst
Deutsche Bank

We continue to be at the proverbial fork in the road. Ask “anyone” where the economy is headed, and the overwhelming conclusion is doubt. Some cautiously insist that while the current recovery is slow, there is hope that consumer spending will improve. Others challenge that view, pointing to valid concerns and fear that the economy will dip into negative territory. Supporting their frustration for a sustained recovery, they point to: (1) the skyrocketing federal debt, (2) the myriad of concerns in the Euro Zone and (3) high jobless rate as politicos continue to bicker, with little end in sight. Other worries focus on failed government policies, large state budget deficits and creeping commodity/cost inflation. All of this is occurring at a time when consumer budgets are constrained, as incomes have not increased as much over the last three years (U.S. personal income increased 1.2 percent from 2007 through Q3 2011).

Culling through the economic data and the multitude of views, we believe consumers’ discretionary income will be under continued pressure. And that will have a downbeat impact on gaming spend. Coming off strong results for companies in our space through the first three quarters of 2011, we would rather share rosy views (and some data is rather constructive these days), but it is important for investors to stay focused on the risks, which in our view include: (1) higher taxes, (2) zero interest rates, which negatively impact savers versus borrowers, (3) continued high unemployment, and (4) cost inflation. Together, these issues reaffirm our view that a solid recovery in the gaming industry may take longer.

First, with inflation already hurting the consumer (food, fuel, health care, state taxes, Port Authority tolls, etc.), we believe higher taxes (payroll, etc.) will add more downward pressure on consumer discretionary dollars and hence impact discretionary spend. Further, a rise in payroll taxes would also increase the wedge between what it costs companies to hire an employee and the employees after tax pay, hence adding pressure on hiring and unemployment. As it relates to the casino business, the net effect of a tax increase, we believe, is a negative impact on what consumers will spend on the casino floor. We believe consumers will reduce discretionary spending as they will have fewer discretionary dollars after the tax increase. Historically, we have seen that destination and regional gaming is extremely discretionary and highly vulnerable.

Second, the current federal policy of keeping interest rates near zero is punishing many households by offering negligible returns on their savings (that too is a tax). This negatively impacts the income many consumers had derived from their savings. With savings rate less than 1 percent, a majority of individuals that are in the retiree or pre-retiree stage are realizing that they no longer have the requisite savings needed to comfortably retire, and this is, in many cases, prompting individuals to postpone retirement by a few years and, in some cases, come out of retirement seeking to join the workforce. And, hence, adding to the labor supply and exerting pressure on unemployment.

Third, turning to the casino business, there is a high degree of correlation between unemployment and non-rated play at regional gaming markets. While visitations at regional markets continue to be stable, spend per visit continues to remain soft—especially in the unrated segment, which is highly correlated to unemployment trends. Given that backdrop, we believe high unemployment will maintain the anemic recovery in regional gaming.

Fourth, higher commodity costs will lead to price increases at the grocery store and gas station, which will put downward pressure on consumers’ discretionary budget. On the first of every month, households now set aside a bigger chunk of their income toward staples and groceries, which now cost much more, thus, leaving behind lesser discretionary dollars in the hands of consumers to spend on a trip to the casino.

In conclusion, casino operators have noticeably experienced a shift in the way consumers spend their discretionary dollars. For example, the American Gaming Association in its 2011 State of the States annual survey indicated that approximately 40 percent of gaming customers set a budget of less than $100 when they visit a casino, and approximately 55 percent of patrons spend less money than they used to on the casino floor versus spending on other forms of leisure and entertainment. Thus, the average casino patron is now getting up early from the proverbial table. While nine-month 2011 results for casino operators (regional and Las Vegas) were better than 2010, we believe the growth in the first half of 2012 will be relatively modest. Clearly, negative economic factors are having an impact on casino spend.