Chapter 15 Casinos

1. Chapter 15 Casinos

2. 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%.

3. 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

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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

10. 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.

11. 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.

12. 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.

13. 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.

14. Changing Trends Promotional Strategies • Many casinos offer complimentary services and goods known as “comps”. • Comps can include things such as caps, T-shirts, 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.

15. 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.

16. 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

17. 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.

18. 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

19. 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.

20. 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.

21. 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.

22. 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.

23. 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.

24. 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.

25. 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

26. 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.

27. 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.

28. 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.

29. 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.

30. 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.

31. 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.

32. 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.

33. 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.

34. 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.

35. 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.

36. 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

37. 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.

38. 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.

39. 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.

40. 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.

41. 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.

42. 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.

43. 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.

44. 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.

45. 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.

46. 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.

47. 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.

48. 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.

49. 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.

50. 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.