The Proper Care & Feeding of the Golden Goose

Under the new paradigm of declining economic conditions across a broad spectrum of consumer spending, casinos face a unique challenge in addressing how they both maintain profitability while also remaining competitive. These factors are further complicated within the commercial gaming sector with increasing tax rates, and within the Indian gaming sector by self imposed contributions to tribal general funds, and/or per capita distributions, in addition to a growing trend in state imposed fees.

Determining how much to “render unto Caesar,” while reserving the requisite funds to maintain market share, grow market penetration and improve profitability, is a daunting task that must be well planned and executed.

It is within this context and the author’s perspective that includes time and grade hands-on experience in the development and management of these types of investments, that this article relates ways in which to plan and prioritize a casino reinvestment strategy.

Cooked Goose

Although it would seem axiomatic not to cook the goose that lays the golden eggs, it is amazing how little thought is oft times given to its on-going proper care and feeding. With the advent of a new casino, developers/tribal councils, investors & financiers are rightfully anxious to reap the rewards and there is a tendency not to allocate a sufficient amount of the profits towards asset maintenance & enhancement. Thereby begging the question of just how much of the profits should be allocated to reinvestment, and towards what goals.

Inasmuch as each project has its own particular set of circumstances, there are no hard and fast rules. For the most part, many of the major commercial casino operators do not distribute net profits as dividends to their stockholders, but rather reinvest them in improvements to their existing venues while also seeking new locations. Some of these programs are also funded through additional debt instruments and/or equity stock offerings. The lowered tax rates on corporate dividends will likely shift the emphasis of these financing methods, while still maintaining the core business prudence of on-going reinvestment.
Profit Allocation

As a group, and prior to the current economic conditions, the publicly held companies had a net profit ratio (earnings before income taxes & depreciation) that averages 25% of income after deduction of the gross revenue taxes and interest payments. On average, almost two thirds of the remaining profits are utilized for reinvestment and asset replacement.

Casino operations in low gross gaming tax rate jurisdictions are more readily able to reinvest in their properties, thereby further enhancing revenues that will eventually benefit the tax base. New Jersey is a good example, as it mandates certain reinvestment allocations, as a revenue stimulant. Other states, such as Illinois and Indiana with higher effective rates, run the risk of reducing reinvestment that may eventually erode the ability of the casinos to grow market demand penetrations, especially as neighboring states become more competitive. Moreover, effective management can generate higher available profit for reinvestment, stemming from both efficient operations and favorable borrowing & equity offerings.

How a casino enterprise decides to allocate its casino profits is a critical element in determining its long-term viability, and should be an integral aspect of the initial development strategy. While short term loan amortization/debt prepayment programs may at first seem desirable so as to quickly come out from under the obligation, they can also sharply reduce the ability to reinvest/expand on a timely basis. This is also true for any profit distribution, whether to investors or in the case of Indian gaming projects, distributions to a tribe’s general fund for infrastructure/per capita payments.

Moreover, many lenders make the mistake of requiring excessive debt service reserves and place restrictions on reinvestment or further leverage which can seriously limit a given project’s ability to maintain its competitiveness and/or meet available opportunities.

Whereas we are not advocating that all profits be plowed-back into the operation, we are encouraging the consideration of an allocation program that takes into account the “real” costs of maintaining the asset and maximizing its impact.

Establishing Priorities

There are three essential areas of capital allocation that should be considered, as shown below and in order of priority.

1. Maintenance and Replacement
2. Cost Savings
3. Revenue Enhancement/Growth

The first two priorities are easy enough to appreciate, in that they have a direct affect on maintaining market positioning and improving profitability, whereas, the third is somewhat problematical in that it has more of an indirect affect that requires an understanding of the market dynamics and greater investment risk. All aspects that are herewith further discussed.

Many people may be wondering what an online casino is. It is a virtual replica of a land based casino, a place where people can play a casino game (any casino game in fact, this being one of the advantages of an online casino). Another advantage of this kind of casino is the possibility to play a free online casino game.

There are two types of players: the ones that play for the money and the ones that play just for fun. The second category now has another option. If they don’t want to go to the casino and spend money while playing, they can choose a free online casino game. Now what’s that? you might ask. A free online casino game is a casino game that you can play for free, just like the name says. The advantage of a free online casino game is that you can enjoy yourself but you won’t loose any money while doing so. These free gaming sites can’t be called online casinos because a casino involves loosing or winning money. When you start playing on this type of gaming site you receive an online casino bonus in the form of credits, points or even currency. This casino bonus will be your virtual money which you can bet with. This is the beauty of a free online casino game: you play, you enjoy yourself, but your pockets are as full as they were when you started.

Another advantage of a free online casino game is that it eliminates the stress factor. Any person who plays in a real casino will be under a lot of stress if he looses all of his money. Fortunately this will not happen with a free online casino game. If you loose all your credits, then you can just ask for more or wait another 24 hour for your credit to restore, depending on the rules of the site.

People have been trying to compare online casinos with land based casinos ever since competition appeared between the two. This is a very tricky thing to do because both have their advantages and disadvantages. It depends on how every person looks at the problem. Suitability is questionable when deciding between a normal casino or an online casino. If you want to play a casino game for fun you should consider going to a land based casino because it’s a lot more fun. You’ll be able to interact with other people, meet a lot of interesting persons, maybe even persons like you who come there for fun and not necessarily for the winnings. At a normal casino you can be caught in the moment and do all kind of crazy things; it’s not necessary to play the games. You can just go there walk around, enjoy your drink and go home.