Casinos

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• Chapter 15
• Casinos

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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.

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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

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Changing Trends

• Major Companies
• The top four large cap gaming operators of 2004,
  as measured by revenue, are Caesars
  Entertainment, Harrahs 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.

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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Identify the critical variables in determining a
casinos profit potential.

• Organizational Structure
• One of the keys to a casinos success is the
  effectiveness of the management team, which
  includes
• President or General Manager
• Vice Presidents
• Games or Casino Manager
• Other floor employees

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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 casinos
  labor costs, while understaffing can lose revenue
  as unsatisfied customers leave to find a casino
  that can meet their service needs.

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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

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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.

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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.

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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 casinos operations.

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Critical Variables in Profit Potential

• Casino Credit
• Casino credit is used primarily as a marketing
  tool. Casinos dont 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.

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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.

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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.

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Critical Variables in Profit Potential

• Credit Decision
• Ability/willingness to Pay
• An applicants willingness and ability to pay are
  determined on the appearance of the applicants
  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 applicants position within his or her
  company
• The applicants age

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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.

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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.

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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.

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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.

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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.

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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.

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Critical Variables in Profit Potential

• Successful Slot Servicescape
• Servicescape satisfaction ratings are influenced
  by overall cleanliness, interior decor, and
  seating comfort as well as ones 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.

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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.

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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.

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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.

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Solutions to Financial Problems

• Player Rating Systems
• Quantifying the Disadvantage
• Quantifying a particular players 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
  players 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 players theoretical value to the
  casino

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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.

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Solutions to Financial Problems

• Estimating the Casino Advantage (cont.)
• Craps
• Craps is more difficult than any other game when
  it comes to determining a players 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.

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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 casinos slot club or the player tracking
  program.
• Management ensures that players use their
  tracking cards through a reward system, in which
  the players gaming volume determines the
  magnitude of the award.

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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.

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Important Financial Ratios

• High Table Occupancy
• Casino profit is equal to wins less expenses.
• The casinos 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.

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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.

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Important Financial Ratios

• Gamblers 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 gamblers 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.

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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.

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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.

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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.

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Important Financial Ratios

• Food Loss Leaders
• Many casinos lose millions annually through
  operating food outlets.
• If a restaurant is casino-operated, its 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.

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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.

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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.

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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.

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Important Financial Ratios

• True Cost
• In some cases an a priori discount can turn the
  houses advantage into the players advantage.
• Quick-Loss Rebates
• Quick-loss rebates are structured to award a
  player the greater of 15 of a players 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.

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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 1990s.

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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.

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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.

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The End!