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Gaming Alternatives

With flat or declining gaming revenues, casinos must focus on growing non-gaming spend

Gaming Alternatives

Second-quarter earnings reports confirmed that regional casino markets remained weak, but some are showing small signs of improvement.

That trend has led to the term “less bad” replacing “the new normal” as the post-recession description of choice.

Evolving colloquialisms aside, market conditions are not leading to optimism that business is ready to boom again.

And this realization might be leading to casino companies thinking about changing their business models, at least a little.

Penn National CEO Tim Wilmott recently said that executives at his company are looking at ways to enhance entertainment returns and other non-gaming revenues. Consumers might not be gambling as much, but they are spending money, he noted.

That’s an interesting comment coming from PENN, a business grown on prosaic properties built at modest cost.

That PENN sees the need to give customers a more exciting experience might be evidenced by its partnership with Cordish Cos. to build a casino in Orange County, north of New York City.

The casino would cost $750 million, considerably more than what PENN normally invests in a new property.

But more telling is PENN’s partner. David Cordish is one of America’s greatest developers. He’s the only person ever to win six awards for excellence from the Urban Land Institute.

And there’s a reason his brand of urban entertainment developments carry the name Live!

Anyone who has visited Maryland Live! casino outside of Baltimore knows it’s live. Anyone who has visited The Walk retail district in Atlantic City, also developed by Cordish, has seen how a super-attractive development can be created in the middle of a city that has a reputation—fair or not—as a slum.

The point is that regional casino companies need to break out of their funk if they’re to revive as attractive businesses for investors.

Quarter after quarter for a half-dozen years we’ve heard casino executives talk about reining in costs, cutting back marketing on low-value players, building in efficiencies.

And, despite assurances that their customer satisfaction surveys continue to generate high scores, we have a feeling that in too many casinos the experience has been just more of the same.

We also are skeptical of in-house surveys. Customers notoriously are not candid in such surveys.

Nor is the practice of tightening slot machines especially enlightened. It improves short-term results, but also diminishes the entertainment value of a casino visit.

Some casino executives scoff at that. Customers don’t know the percentage payback of a slot machine, they say.

But customers do know that what was once a night of entertainment is now money gone in an hour, and there’s not much fun in that.

Indeed, the customers most affected might be the very ones casinos say are missing the most—the low-value player who doesn’t get the promo offers and perks that continue to attract high-value players.

Yet, ironically, it is exactly the low-value players who are needed to broaden the customer base. There are a lot more of them than there are hard-core gamblers.

Vernon Hill, who built a multibillion-dollar bank from scratch based on extraordinary customer service, used to point to much larger banks cutting services during recessions and conclude, “You can’t cost-save your way to prosperity.”

It might be time for regional casino operators to practice that same lesson, and put more excitement into the customer’s experience so they can put more excitement into the shareholder’s experience.

Of course, that’s easier to say than do, especially when finances are a factor, and when shareholders are focused on immediate actions to bump up stock prices rather than investments to build the business long-term.

And it’s always easy to give advice.

Meanwhile, the proliferation of casinos has created saturated—or nearly saturated—markets in many regions, a fact that limits the potential of most new developments and heads off prospective redevelopments.

However, there are pockets of opportunity. Whoever wins the Boston license should be able to generate $600 million a year or more in gaming revenue.

MGM Resorts’ project in Prince George’s County, Maryland, promises to be a huge revenue-generator, given its location just outside Washington, D.C., and just across the Virginia state line.

It is a market big, rich and unlikely to face new competitors for many years, if ever.

But in most of the country, new casinos are doing more to cannibalize incumbent casinos than to grow markets.

In other words, the regional casino industry might be near the point of having the worst of both worlds—competitors everywhere coupled with the high tax rates that were justifiable when casinos were oligopolies.

And politicians rolling back taxes in light of that increased competition is highly unlikely.

Still, in the case of publicly owned companies, there is a need to find ways to grow.

And, as is implicit in Wilmott’s comments, those ways might include going beyond the traditional spin of the roulette wheel or slot reel.

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