Transcript Chapter 15 Casinos Identify the changing trends in and demographic profiles of the casino market. U.S.

Chapter 15
Casinos
Identify the changing trends in and
demographic profiles of the
casino market.
U.S. Gaming Market
United States
In 2002, gross gaming revenue in the United
States peaked at over $68.7 billion.
The global gaming environment is in the midst of
a rapid growth period.
There is a population of 197.2 million adults
(over the age of 21) in the U.S. Of that
population, 51.2 million are casino gamblers;
which makes the casino gaming participation
rate about 26%.
Changing Trends
State by State
Utah and Hawaii are the only states that
ban gaming entirely
The three most pertinent forms of
gambling are:
– Land-based gambling
– River-boat gambling
– Native American gambling
Changing Trends
Major Companies
The top four large cap gaming operators of
2004, as measured by revenue, are Caesars
Entertainment, Harrah’s Entertainment,
Mandalay Resort, and MGM Mirage.
Native American (Tribal) Gaming
The Indian Gaming Regulatory Act of 1988
allowed Native American gaming facilities to
begin proliferating in earnest.
Currently, tribes operate 203 Class 3 (casino)
and 72 Class 2 (bingo) gaming operations in 29
different states.
Changing Trends
Native American (Tribal) Gaming (cont.)
Economic development strategies have aimed to
stimulate depressed regions, cities, and
communities by utilizing the rise of gambling
activity as a tourism policy.
Today, roughly 330 casinos are run by more than
200 tribes across 28 U.S. states.
Southeastern Connecticut is the home of the
largest Native American casino market.
Changing Trends
From Casinos to Resorts
Casinos have two general objectives: extending
the length of stay for on-site guests, and
broadening the appeal in order to increase the
potential market.
First phase: Casino serving a local market
– Las Vegas needed to become a destination because
it had virtually no local market to rely on. In its first
growth stage, Las Vegas attracted local customers
simply because of the legalized gambling, but that
was not enough to promote additional growth.
Changing Trends
Second phase: Increased competition from other
locations
After the legalization of tribal gambling and
gambling in other states, Las Vegas lost its
virtual monopoly on the gambling industry.
Las Vegas entered its second major growth
phase by tapping into the mass market by
offering 99 cent buffets and inexpensive lodging.
Traveling to Las Vegas to gamble became a
more feasible option for many casino-goers.
Changing Trends
Third phase: Entertainment convergence
The attributes that exist for a casino in the third
phase of development include:
– The area experiences a greater increase in the total
visitor revenue per capita.
– Elements of entertainment and hospitality transition
from marketing costs to centers of profit.
– The average length of stay for guests extends.
– The area experiences a slight decrease in per-capita
gaming revenue.
Changing Trends
Objectives of Resort Casino Development
There are numerous ways to increase
revenue:
– attracting a new type of guest demographic
– extending guest stay
– attracting guests from a wider market area
– through direct revenue through new elements
– arrest market-share erosion from competitive
casino-resorts
Changing Trends
Role of specific elements
An entertainment retail center is the
element that has the greatest potential
impact on casino resort development.
Potential revenue from a residential resort
development can have an impressive
impact.
Changing Trends
Casino Gamblers
Profile
Atlantic City is the second-largest gambling market in the
entirety of the United States.
Roughly 53 million Americans participate in casino
gambling.
Gamblers’ median age is 46.
Nonetheless, gambling is most popular in the 51 to 60
age group.
Casino gamblers have a male/female ratio of 45/55.
Of the gamblers, 46% graduated or attended college.
Changing Trends
Casino Gamblers
Profile
The states that generate the most casino trips
are California, Illinois, Nevada, New York, and
Michigan.
The income level of gamblers is on average
higher than the rest of the populations.
Higher-income gamblers are the ones who bear
the financial burden of casino gambling.
However, lower-income gamblers living in Las
Vegas spent more of their income on gambling
than the wealthier Las Vegas dwelling gamblers.
Changing Trends
The Games People Play
Casinos choose to allocate roughly 80% of
their floor space to slot machines and
other EGDs.
Approximately half of all slot players prefer
25-cent and 50-cent machines.
Blackjack is by far the most popular table
game, followed by roulette and craps.
Changing Trends
Promotional Strategies
Many casinos offer complimentary services and
goods known as “comps”.
Comps can include things such as caps, Tshirts, and buffets for the low-end players, up to
dinners, transportation, and hotel rooms for the
higher-end players.
A “whale” is a type of gambler that generally
wagers $50,000 or more per hand and can
easily wager $10 million in only a weekend.
Whales never pay for any part of their trip.
Changing Trends
Impact of Heavy Spenders
“Whales” or “high rollers” account for the
bulk of casino wins. Roughly 13% of
casino player club members generate
about 84% of total tracked revenue that is
associated with loyalty club members.
Identify the critical variables in
determining a casino’s profit
potential.
Organizational Structure
One of the keys to a casino’s success is
the effectiveness of the management
team, which includes:
– President or General Manager
– Vice Presidents
– Games or Casino Manager
– Other floor employees
Critical Variables in Profit Potential
Staffing
The adequacy of customer service and the
overall profitability of a casino operation
are directly affected by proper staffing.
Overstaffing unnecessarily increases the
casino’s labor costs, while understaffing
can lose revenue as unsatisfied customers
leave to find a casino that can meet their
service needs.
Critical Variables in Profit Potential
Number of Dealers Needed
In order to calculate the number of dealers
needed on a given day, the casino manager
must:
– determine the number of stations that must be
manned for each day of the week in question
– consider how many dealers will be necessary to keep
the stations open yet still allow for scheduled breaks
– figure out how many days employees work per week
and the average vacation time per employee each
year
Critical Variables in Profit Potential
History
In 1985, the Secretary of the Treasury
determined that the definition of a financial
institution needed to be expanded to include
casinos.
There were many ramifications that stemmed
from the announcement, but the most important
is that a casino must report any transactions that
involve greater than $10,000 in cash that occur
during any 24-hour period.
Critical Variables in Profit Potential
Front Money and Safekeeping Deposits
There exist unique methods for handling player
deposits for front money or safekeeping. Two
options in particular stand out:
– Physical segregation of the cash deposited; placing
the cash in a designated location and returning the
same cash to the patron.
– Recording the number of bills of each denomination in
a given cash deposit. The deposit is returned to the
player in the same denomination and number of bills
that were in the original deposit.
Critical Variables in Profit Potential
Casino Cage, Credit, and Collections
Casino Cage
The area known as the casino cage
functions as the financial center of the
operation.
It maintains an accountability of the chips,
tokens, and cash that are used in order to
fund the casino’s operations.
Critical Variables in Profit Potential
Casino Credit
Casino credit is used primarily as a
marketing tool. Casinos don’t charge any
interest for the use of their funds, but
credit is usually only given to players who
the casino believes will take full advantage
of the line by gambling with the new funds.
Critical Variables in Profit Potential
Types of Casino Credit
Check-cashing privileges are one form of casino
credit.
The total amount a casino is willing to extend to
a customer is known as the credit line.
The term “front line” corresponds to players who
bring cash to the cage to deposit.
If the player only desires that the cage hold the
funds for security and convenience reasons, the
procedure is known as safekeeping.
Critical Variables in Profit Potential
Classes of Customers
Roughly 75% of those who apply for casino
credit have casino credit somewhere else.
Any person who has applied for casino credit at
four or more establishments during a two-week
time span is labeled “4 in 14.”
According to casino research, 80% of “4 in 14”
applicants will write a bad check sometime in the
next six months.
Critical Variables in Profit Potential
Credit Decision
Ability/willingness to Pay
An applicant’s willingness and ability to pay are
determined on the appearance of the applicant’s
bank account and a report from Central Credit.
Other factors that influence this attribute are:
– The length of time the applicant has been in business
– The applicant’s position within his or her company
– The applicant’s age
Critical Variables in Profit Potential
Setting limits
Setting appropriate credit limits protects
not only the casino but also the applicant.
Slot Management
Roughly 50% of the total casino win
comes from slot machines.
In Nevada, slots are responsible for
generating more than 67% of the total
casino win.
Critical Variables in Profit Potential
Cashless Casino
Cashless slots are configurable to return
bar-coded tickets or coins.
The slot player who receives a ticket has
the option of cashing it at the change
booth or taking it to another machine.
Critical Variables in Profit Potential
Participation Games
Now the typical machine lasts only two to
three years, with video reels that
experience shelf lives only six to nine
months long in some markets.
This decrease in shelf life is a result of a
decrease in demand.
Critical Variables in Profit Potential
Participation Games (cont.)
In the lease/purchase system of slot machines,
the amount of the lease/purchase payment is
used toward the ultimate purchase of the
machine.
Under a participation agreement arrangement,
the casino pays nothing up front for the slots.
The manufacturer and the casino then share in
the revenue the machine generates; based on a
predetermined percentage division.
Critical Variables in Profit Potential
Types of Slots
The three main slot categories are multipliers,
line games, and buy-a-pays.
Mechanical Configuration
The elements include payoff schedule/reel strip
combination, coin denomination, casino
advantage, and hit frequency.
Casino Advantage
Slot machines usually average 0.5 percent up to
25 percent casino advantage.
Critical Variables in Profit Potential
Hit Frequency
Hit frequency refers to the percentage of trials
during which the machine pays something back
to the player.
Floor Configuration
Slot machines should be arranged at the
entrance and the exit of anchors in such a way
that customers will be exposed to the maximum
number of machines upon passing through the
doorway.
Critical Variables in Profit Potential
Successful Slot Servicescape
Servicescape satisfaction ratings are influenced
by overall cleanliness, interior decor, and seating
comfort; as well as one’s ability to navigate the
casino floor.
In a casino setting, the ambience may be judged
according to cigarette smoke levels, overall
lighting levels, sounds of excitement (clanking
sound of coins or dinging of slot bells), and air
temperature.
Critical Variables in Profit Potential
Table Game Operations
Revenue and Profit per Square Foot
In a casino, however, highest and best use of
floor space describes that which generates the
maximum profit. Profit, rather than revenue,
should be the maximized value.
Maximizing Profit per Available Room
A great deal of untracked spending appears to
occur in hotel segments including Group
Business, Free Independent Travelers, and
Wholesale.
Identify potential solutions to
financial problems faced by
casinos.
Casino Accounting
Table Drop and Count
Casinos, unlike most businesses today, do not
record transactions at the point of sale. The
proceeds of the shift of the day are unknown
until the count is performed.
Slot Drop and Count
The drop from the slots is different from table
games drop because the amount removed from
the slot machines is known.
Solutions to Financial Problems
Internal Audit
The Nevada Gaming Control Board has
established Minimum Internal Control
Standards (MICS) for use in internal audit
functions.
The MICS declare that all internal audits
must be independent of the department
subject to audit.
Solutions to Financial Problems
Player Rating Systems
Quantifying the Disadvantage
Quantifying a particular player’s disadvantage is one of
the greatest challenges that faces casino management
today.
The profitability of any one character can be determined
by how the game is played, the player’s skill level, the
bets played, the total amount wagered, and the speed
with which the game is played.
In order to maximize profit yet still deliver comps to the
players, management must be able to determine a
player’s theoretical value to the casino
Solutions to Financial Problems
Actual vs. Theoretical Win
The formula for theoretical win is:
– Average bet * hours played * decisions per hour *
house advantage
Estimating the Casino Advantage
Blackjack
Casino marketing rarely focuses on players who
do not bet at least $50 per hand.
A customer who plays alone at a table will be
dealt roughly four times as many hands per hour
as the same customer who plays at a full table.
Solutions to Financial Problems
Estimating the Casino Advantage (cont.)
Craps
Craps is more difficult than any other game when it comes to
determining a player’s percent disadvantage and average bet.
An average craps player is more difficult to handicap because his
bets must be placed along with the amount that will be bet on
proposition wagers.
Roulette
On a zero (or double-zero) roulette wheel, the player disadvantage
on every bet (except one) is 5.26%.
Baccarat
The casino employee should choose the most conservative skill
level if doubt exists.
For rating purposes, a conservative skill level will provide the lowest
house advantage.
Solutions to Financial Problems
Rating Systems
Tracking individual play, summarizing the
gaming activity at the player level, and storing
demographic player data can all be achieved by
a slot player rating system.
Casinos obtain information when players enroll
in the casino’s slot club or the player tracking
program.
Management ensures that players use their
tracking cards through a reward system, in
which the player’s gaming volume determines
the magnitude of the award.
Identify the most important financial
ratios relevant to casinos.
Table Game Hold as a Management Tool
Uses
Table game hold represents the
percentage of chips bought at the table by
the customer that the house wins back.
Casino management uses hold when
making decisions on employee honesty
and productivity.
Important Financial Ratios
High Table Occupancy
Casino profit is equal to wins less expenses.
The casino’s two main types of expenses are:
– Payroll expenses, which are indirectly correlated to
the number of customers, but directly related to the
number of open games
– Expenses that directly relate to customers (gaming
taxes, complimentary beverages, etc.)
When management attempts to increase
occupancy by putting the same number of
players at fewer games, the return on labor is
increased successfully, but the maximization of
profit is not achieved.
Important Financial Ratios
Casino Marketing
Marketing costs have continually risen as
competition between casinos has risen.
Match Plays and Nonnegotiables
Match play coupons and nonnegotiable chips
(like promotional chips) are increasingly being
used as a marketing strategy.
Nowadays, match play coupons and
nonnegotiable chips are given away in much
larger increments and at times, hundreds of
dollars.
Important Financial Ratios
Gambler’s Spree
If a well-known casino is offering a certain program, it is
more likely to be adopted by a competing casino,
regardless of its actual merits.
The proliferation of $5 table game programs is one
example of “gambler’s sprees.”
Dead Chips and Chip Warrants
A chip warrant is a voucher, generated and controlled by
the casino. The player presents it at the table, receiving
an equal amount of nonnegotiable chips known as dead
chips.
Important Financial Ratios
Dead Chips and Chip Warrants (cont.)
A player may purchase a chip warrant for
$100,000 at the casino cage. The casino agrees
to rebate the player somewhere around 1 to 3
percent of the purchase, after the dead chips are
lost.
The dead chips can be wagered just like live
chips, and winning bets are paid in live chips.
Once all the dead chips have been wagered out,
the live chips that the player possesses
represent actual cash, which they can be
exchanged for at the casino cage.
Important Financial Ratios
Dead Chip Commission
The dead chip bonus can be awarded
after the end of play, rather than at the
beginning.
The player will pay all of the face value of
the dead chips, and after they are lost, he
or she will receive a cash refund equal to
the dead chip bonus.
Important Financial Ratios
General Slot Marketing
Cash Mail
Direct mail promotions consist of cash incentives
in tiered offerings.
Restaurants and Slots
The notion that restaurant operations can
successfully generate slot play is popular, but
has been proved incorrect. The success of this
strategy varies between properties.
Important Financial Ratios
Food Loss Leaders
Many casinos lose millions annually through operating
food outlets.
If a restaurant is casino-operated, it’s more likely to incur
substantial losses.
Contracting outside restaurant companies to operate
food service is one option.
Drawing-Based Promotions
Customers acquire tickets though winning top award
jackpots on specific slot machines. The two-part,
numbered ticket is torn and half is thrown into a drawing
drum, with the remaining half going to the customer.
Cash prizes for these drawings can reach up to $1
million.
Important Financial Ratios
Acquire, Retain, Recover
Slot marketing can be divided into three categories:
customer acquisition, customer retention, and customer
recovery.
Consumer Choice Factors
The general convenience of a location is one factor that
causes consumers to choose one casino over another.
Rebates on Losses
Premium players are often offered a rebate on their
losses by casinos who want to retain their patronage.
Important Financial Ratios
Premium Player Segment
Marketing to premium players is threefold:
– One part of the equation is the amenities offered by
the property.
– The second part involves the hosts, who serve as
communicators between the high roller and
management.
– The third part is defined by the deals that are offered
to the premium player.
If any one of these elements is missing, the
casino will find it more difficult to attract the high
rollers it wants.
Important Financial Ratios
Definition
A three-tier framework can be used to describe a
“premium player”
– Tier-1 players have a maximum credit line of $20,000.
– Tier-2 players’ credit lines range from $100,000 to $500,000.
– Tier-3 players have credit from $1 to $5 million.
Acquisition Costs
The costs associated with attracting high rollers have a
deleterious effect on premium-play profits.
Costs have become so high that some casino owners
are questioning the profitability of this segment.
Important Financial Ratios
True Cost
In some cases an a priori discount can turn the
house’s advantage into the player’s advantage.
Quick-Loss Rebates
Quick-loss rebates are structured to award a
player the greater of 15% of a player’s actual
loss or 45% of theoretical win, in order to cover
airfare and room, food, and beverage costs.
This rebate may exist because management
believes that short-term losses will be kept by
the casino.
Important Financial Ratios
Costs of Competing
Casino managers give premium players free
rooms and expensive food, which obviously
have costs associated with them.
Casinos do not set any minimum-play criteria for
these players, endangering their profit potential.
Discounting Rationale
The process of discounting and rebating is fairly
young, having first appeared in the 1990’s.
Important Financial Ratios
Discounting Rational (cont.)
They probably began with high rollers losing huge
amounts of money and being unable to pay the full
amount. A discount was offered, on the theory that
collecting something is better than collecting nothing at
all.
Eventually, this discount turned into an incentive, to be
used in bidding wars; players benefited.
Although casinos may recognize the damaging effects of
their discounts, they still want the high-roller visits.
These discounts can have a catastrophic effect on profit.
Important Financial Ratios
Discounting Dangers
In the case of loss rebates, players must be
asked to play a minimum number of hands to
ensure that the casino does not lose money.
Discounting policies should also prevent players
from pooling their actual losses from different
games, because the house advantage varies
from game to game.
When misapplied by people who do not
understand the math, discounting can be truly
disastrous.
The End!