Seven Keys to Casino Success

The success of Singapore’s recently established casino industry, along with the unprecedented growth in gaming revenues in Macau, has attracted the interest of governments throughout Asia. Several are considering instituting new policies that will permit the expansion of casino gaming in their countries in the form of so-called integrated resorts, as a means to boost
economic and tourism growth and generate tax revenues.

The examples of Macau and Singapore, together with those of other Asian countries that did not manage to enjoy quite as much success with their casino initiatives, have helped identify seven factors that are critical to the success of any new gaming venue in the region.

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Legislative Dynamite: State failures the exception to the rule

As state budget crises continue to sweep across the nation due to the effects of the Great Recession, more and more states are making foolhardy decisions in an attempt to plug part of a budget deficit that may benefit them in the short term but will ultimately hurt them in the long run. Many investors in the gaming world have historically been gun-shy of investing in many international destinations due to legislative risk, viewing the United States as a stable jurisdiction in which the future is predictable. However, events of recent years have shown this premise of legislative stability in the United States as false.

New Jersey, feeling the pressure to expand gaming outside of Atlantic City to help reduce its deficit, has an opportunity to do it the right way that will benefit all stakeholders. Hopefully, they follow sage advice and set the example to how to responsibly expand gaming while simultaneously benefiting companies that have invested billions in their state.

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Russian Roulette: Is Vladivostok Russia the Next Important Gaming Destination in Asia?

Vladivostok, Russia, a city much closer to Beijing than Macau and bordering northern China; a city in which President Vladimir Putin has spent over $18 billion over the past four years improving and building; the incredibly strategic southernmost port city in Russia, has opened its doors to the world to develop the integrated entertainment destined to be a world-class casino-resort destination serving northeastern Asia, and in particular, northern China.

All you have to do to understand its potential is look on a map. However, there is no buzz in the industry, and operators are quickly missing the next new gaming destination in Asia.

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Asia: Seven Steps to Success

Call it the Macau/Singapore effect.

The initial success of integrated casino resorts in Singapore, coupled with the unprecedented growth in gaming revenues in Macau, has attracted the interest of government policy-makers in
countries throughout Asia. Several are now considering instituting new policies that will permit the expansion of casino gaming in their countries in the form of what is now being referred to as integrated casino resorts, and with it, both economic and tourism growth.

The success of Asian resorts has helped identify those factors that are critical to the success of any new gaming venue. Here are seven factors that are critical to creating a successful gaming policy that grows tourism, enhances tax revenues and acts as an engine for economic growth.

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Improving the RFP Process

The Request for Proposal or RFP process, the method in which governments issue requests for proposals to a number of vendors, evaluate competing bids and select the vendor that can provide the best product/service at the best price, is an important process that can ensure governments and its citizens are not overpaying for goods and services. The process is used by municipal, state, federal and tribal governments. While the RFP process has proven effective in a wide range of purchasing decisions, the adaptation of the RFP process to the selection of vendors for casino companies has proven itself to be somewhat problematic.

RFPs can be used in a wide variety of purchasing decisions, from meat vendors and accounting firms to the selection of a new advertising agency.

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What Can We Learn from Macau

As gaming markets mature and individual casinos’ databases become established, casino operators are able to better understand the demographic makeup of their core customers. With few exceptions many Indian casino operators have come to recognize that Asian Americans, in particular immigrants from China, make up a sizable minority of their customers and display an almost passionate love of casino gambling. To better serve this important segment, many casinos have introduced noodle bars, expanded Asian food offerings in their buffets, added Chinese speaking hosts and printed collateral material in various Asian languages. Some have also brought in Asian entertainers. While these programs make sense, they are essentially tactical plans that
are put in place on a hunch rather than understanding that player segment’s wants and needs. They fail to recognize that not all Asian American gamers are alike and each nationality has its own particular appeals.

For most domestic markets, Chinese Americans are the most dominant Asian gaming segment. Notwithstanding some markets may be comprised of other nationalities. Therefore, it is critical to first understand which Asian nationalities comprise the largest part of the casino’s demographic mix. If Chinese Americans are indeed the largest, then it is important to understand their unique wants and needs. And to really understand what motivates Chinese gamblers, you have got to go to Macau.

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“New and Better” works

The rapid growth of Indian gaming has created an unusual dilemma for the leaders of many tribes. In the years following the passage of the Indian Gaming Regulatory Act, many tribes attempted to develop casinos. Unfortunately, it was unclear how successful these gaming properties would ultimately be, particularly for those tribes whose reservations were far removed from major population centers. Access to traditional capital markets was difficult. Amidst this uncertainty many casinos were developed using low-cost construction techniques or existing commercial structures were converted to gaming space.

As the industry matured and as properties were able to demonstrate their viability to the investment community, the cost of capital dropped and many tribes were able to replace their temporary structures with more attractive, full-service gaming/entertainment properties. Conversely, other tribes chose to keep their original properties and gradually expand them, all the while continuing to employ low cost construction techniques. Many of these casinos generated outsized revenues relative to their invested capital. The logic for many in tribal leadership was, why
incur additional debt by replacing low-cost structures when revenue streams were growing? The emerging dilemma was, why spend the money if one did not have to?

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Designing the Right Amenity Mix

When leadership decides to commit to an expansion of its gaming facility or a wholesale replacement of its casino, the first step is to determine the proper size of the proposed gaming operation. This exercise involves examining the current utilization of the existing facility, the size of the primary and secondary markets that the casino will serve and the gaming behavior of those markets. While not a precise science, determining the right number of gaming devices, table game positions and casino square footage is based on proven mathematical models. Although
complex, these models can accurately determine the proper sizing of a casino.

The next step is to determine the appropriate mix of nongaming amenities that will support the gaming operation in order to maximize gaming revenue. Non gaming amenities are most often comprised of restaurants, hotel rooms, meeting and banquet facilities, entertainment venues, retail outlets and leisure/recreation operations such as golf courses, movie theatres, nightclubs, bowling centers, arcades and child care facilities. While determining the right amount of hotel rooms and banquet/meeting facilities is primarily an empirical exercise, identifying those other amenities that will maximize gaming revenue and best meet the needs of the market requires far more investigation.

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Build Your House Out of Bricks

About fifteen years ago, Steve Wynn, then CEO of Mirage Resorts, gave a speech to an audience of alumni and students at a prestigious college of hotel administration. He began by reciting Grimm’s fairy tale of The Three Little Pigs. At first the audience collectively laughed as Mr. Wynn began his recitation but it soon became evident that Mr. Wynn was to recite the entire fable. And so he did.

Mr. Wynn later explained that the lessons taught in this fairy tale were important to the hospitality industry and equally applicable to casino developers as to children. Build a house out of bricks rather than straw or wood and you will be able to weather any storm or wolves that threaten your house. Since its opening in 1989 the Mirage withstood the introduction of more than a half dozen new competitors. Fifteen years later the Mirage continues to compete with the best properties in Las Vegas. In the coming months the Mirage will introduce new nightclubs, restaurants, a Beatles themed Cirque du Soleil show and an improved volcano attraction. Room rates and slot win per unit have and continue to remain well above the market average. After all,
the property was built out of bricks.

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Why Expansion Projects Falter

Several years ago a casino embarked on a significant expansion of its gaming floor as well as non-gaming amenities, including new restaurants, movie theatres and a showroom. First it hired a reputable firm to conduct a feasibility study to determine if the project and all of its components were feasible. The consulting team that authored the feasibility study analyzed the local and drive-in markets, addressed new cachement areas, conducted demographic and psychographic analyses of those markets, determined which segments of the population in those markets would be attracted to the new amenities and prepared its forecast. The feasibility study also addressed future amenities, including a hotel and retail outlets, and advocated the development of a master plan.

Leadership used the feasibility study to secure financing for the project. They then assembled a design team including an architect, engineering firm and interior design specialists to build the facility along with in-house professionals from operations, entertainment and marketing to manage the opening and subsequent operation of the expansion.

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