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Look Up or Look Out?

Have U.S. gaming revenues turned the corner?

Look Up or Look Out?

As the discussion over lingering post-recession sluggishness in gaming performance—particularly slot performance—enters yet another year, it is worth taking stock and examining what the year-end 2015 numbers show. Did we round the corner in 2015? Or should we continue to look toward the horizon with low expectations?

The following analysis examines gaming revenue trends nationally, in four broad regions with overlapping markets, and in three states with isolated commercial markets. Data from all commercial casinos and Connecticut slot revenues are included in the analysis.

After years of head-scratching results—if the economy is improving, why haven’t gaming revenues?—we can be cautiously optimistic that 2015 represents a turnaround year. A number of jurisdictions and overlapping regional markets saw results improve in 2015, and the impacts of new jurisdictions—with a couple of exceptions—are finally being absorbed by neighboring jurisdictions.

On the economic front, employment and wage growth accelerated starting mid-to-late 2014, helping to break the stretch of sluggish casino performance post-recession.

The National Picture

Nationally, gaming revenue bounced back in 2015 after a small decline in 2014. Table revenue declined slightly in 2015 after having posted strong growth in 2012 and 2013, which largely resulted from new table jurisdictions opening in Maine, Maryland, Ohio and Rhode Island.


Slot revenue rebounded in 2015 after a slight decline in 2014. The strong growth in 2012 was attributable primarily to the addition of the new jurisdiction of Ohio, the first full year of Resorts World New York, and the opening of Maryland Live!

It is worth highlighting that a number of mature markets experienced growth, although the good news in 2015 was largely due to the first full year of two new slot facilities in Ohio, the first full year of Horseshoe Baltimore, and expansions in Arkansas. States where slot revenue declined all faced increasing competition from neighboring jurisdictions, or in the case of Illinois, internal competition from video machines in licensed liquor establishments.


Regions of Overlapping Markets

%image_alt%Given the extensive market overlaps in the East, Midwest and South, it is useful to examine trends on a regional basis, since new developments in one state can cause declines in a neighboring state. We have identified the following regions for analysis:

• Atlantic Coast: the contiguous gaming markets starting with Plainridge in the north and ending in the Chesapeake region, including Rhode Island, Connecticut, the two New York City-area racinos, Atlantic City, Eastern Pennsylvania, Maryland, and Charles Town, West Virginia.

• Ohio Valley: Western Pennsylvania, Ohio, Western West Virginia, Detroit, and central and southern Indiana.

• Midwest: Western Indiana, Illinois, Iowa and Missouri (including Kansas City, Kansas).

• Mississippi River Delta: Arkansas, Louisiana and Mississippi.
The Atlantic Coast region saw a small acceleration in growth in 2015, as gains in eastern Pennsylvania, Maryland and New York City area outweighed declines in Connecticut and New Jersey. Delaware posted its first gain since 2006 and Charles Town, West Virginia, also grew following a string of losses, despite 2015 being the first full year of Horseshoe Baltimore. Connecticut’s 2.2 percent loss was nevertheless well below its annual average loss of 7.4 percent during the previous three years, and Rhode Island managed to grow despite facing new competition at nearby Plainridge Casino.


Ohio had three VLT racinos open in mid- to late 2014, making 2015 the first full year of operation for all 11 of the state’s available licenses (four stand-alone casinos in Cincinnati, Cleveland and Columbus and seven VLT racinos). The final two to open, in Dayton and Youngstown, were in greenfield markets, which tend to foster a higher ratio of market growth to cannibalization, as evidenced by the 12.8 percent growth in 2015.


The impact of Ohio continues to be felt in southern Indiana and western West Virginia, although this would be expected to taper off now that Ohio is fully built out. Detroit and western Pennsylvania appear to have already turned the corner, posting gains in 2015 after having suffered declines through 2014.

Revenue has generally stabilized in the Midwest, although Illinois continues to be impacted by the spread of VGT facilities throughout the state. Iowa benefited by a new casino in Jefferson and a new license holder in Sioux City, with a Hard Rock land-based operation replacing an old riverboat casino in mid-2014. Encouragingly, Missouri, a highly mature market, posted a 2.5 percent gain in 2015 after numerous years of decline.


Insulated State Markets

Similar to trends in overlapping market areas, insulated state markets are also experiencing an uptick in 2015 revenues over previous years. Colorado, which has been minimally impacted by expanded gaming markets either internally or externally, was slow to recover from the Great Recession, and showed a slight decline through 2014. Florida was a slightly different story, as a new facility opened in each year following 2011.


On the whole, revenues for the state of Nevada have been relatively stable over the past five years. The remainder of the state has fared better than the Strip, which has declined year-over-year since 2012. As a destination market, the Las Vegas Strip has been more sensitive to external events such as the slowdown in the Chinese market.


Economic And Demographic Trends

Economic factors go a long way to explain recent gaming revenue trends. As the following chart shows, employment has been rising steadily since bottoming out in February 2010 at 129.7 million. However, it wasn’t until mid-2014 that employment had recovered to its pre-recession level. Employment growth accelerated beginning in mid-2014 and now stands at 3.4 percent above its pre-recession peak.


But the number of jobs is only part of the story—how much those jobs are paying and what household income looks like help to complete the picture. During the past 15 years, household income has lagged far behind gains in productivity.

The widening gap in the following chart illustrates that American households effectively have not been earning enough to purchase all the goods and services the economy has been producing. Consumer expenditures on gaming and other leisure activities remained strong into 2007 largely on the basis of rising home values; however, gaming revenues started a steady and pronounced decline once the housing bubble burst and the financial sector collapsed. Although 2013 saw a slight uptick in real income (0.35 percent), the first since 2007, income trended down again in 2014.

In fact, national median household income remains only marginally higher than it was 25 years ago (in constant 2014 dollars). Even before the recession hit in 2008, real median income was lower than it had been in 1999 and 2000, as incomes declined from 2001 through 2004.

Real median income data is not yet available for 2015. However, early indications are that wage and salary trends finally started to rise late in 2014 after being flat for most of the post-recession period.

Regional variations in employment shed some light, although they are not uniformly consistent with gaming trends. Florida and Nevada were affected the most by the recession, and correspondingly have seen the sharpest increase since 2010, although Nevada remains 3.1 percent below its pre-recession peak. Also of note is Colorado, where employment is 8 percent higher than pre-recession levels.


Despite the generally improved employment picture from the recession in 2008, in most regions, working-age population growth has exceeded that of employment. As a result, employment participation rates (employment divided by the working-age population) have yet to reach their pre-recession levels. The exceptions are the Atlantic Coast and Ohio Valley, although the latter case is a result of minimal population growth rather than robust employment growth. The largest gaps are in Nevada and Florida, both of which have had continued robust population growth despite the economic challenges.


The Great Hold Percentage Debate

There has been a lot of discussion in the gaming press recently regarding the theory that increases in slot hold have turned off players and contributed to the sluggish trends in slot revenue. A look at the data suggests two problems with this theory.

First of all, the claim of runaway hold increases is overstated. As illustrated in the following table, in a number of states, hold percentages have been relatively stable, and in two states—Delaware and New York—have even decreased since 2004. Connecticut and West Virginia have had no change in slot hold, while New Jersey and Nevada have increased by less than one percentage point.


Secondly, if you take a closer look at the states where there has been an increase, you will find that most of the increase occurred before the recession took hold, during a period when slot revenues were skyrocketing. The three states with the highest hold increases from 2000 to 2008—Iowa, Indiana and Missouri—also had the highest revenue increases. Illinois was hit by the smoking ban implemented in January 2008; revenue was up by 30 percent through 2007.


With the exception of Illinois, increases in hold percentages since the recession have been miniscule. Further, they have been driven largely by free play, which implies that the majority of slot players have not seen their playing-time value decrease during the post-recession era.

In summary, the explanatory power of hold increases pales in comparison to economic trends in assessing the causes behind sluggish casino trends in the post-recession era.

Luck or Positive Outlook?

In a study published in Psychological Science, researchers found that being in a good mood from sunny weather or watching your favorite sports team makes people feel lucky and more likely to gamble. In the language of the academy, “unexpected but incidental positive outcomes influence risk-taking.”

Although it will be some time before 2015 data from tribal casinos is available, it appears that a ray of sunshine in the form of an improved employment and earnings picture may finally be settling on the gaming industry.

Tom Zitt is a partner in the Innovation Group. Since joining the Innovation Group in 1997, Zitt has excelled at market analytics and high-level strategic planning, earning with his reports a reputation for accuracy and reliability unsurpassed in the gaming industry. He has assessed the economic, social, and fiscal impacts of gaming in numerous developing jurisdictions, including Massachusetts, New York, and Ohio. Zitt has also conducted regional analyses for investment firms like CIBC World Markets, Deutsche Bank, and Bear Stearns, looking to understand the impacts of new gaming development.

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