Research Library

How to Increase Gaming Revenue in an Economic Downturn

The economic downturn continues to impact gaming revenues in markets throughout the United States. In the face of declining or stagnant revenues, casino operators continue to look for new ways to grow gaming revenue. Some have allocated resources to new media such as social networks, yet none have been able to monetize these new channels of communication. Others have simply turned up the volume of promotions, offering more drawings for cash, vehicles or simply giving away stuff to get people into the door. While those efforts often increase foot traffic, they don’t necessarily have a positive impact on profitability. So what new methods are there for a casino operator to grow revenue? The answer often lies within its own database.

Casinos have long recognized the value of their databases. With the advent of newer slot system technologies casinos have over the last decade introduced tiered reward programs to better acknowledge the value of higher value customers. Caesars Entertainment has long been at the forefront in utilizing a tiered reward program to acknowledge those customers and develop them into very loyal customers. Customers in those premium tiers, referred to as Platinum, Diamond and Seven Star levels, receive a suite of benefits so great that they often gamble exclusively within the Caesars brand family of casinos. They would rather aspire to the next higher tier than spend their gaming dollars at another casino.

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Emerging Issues in the Use of Free Play

Non-negotiable slot credits or what is commonly called free play has become the primary form of customer incentives in many casinos. Free play is now used instead of cash for point and coupon redemptions as well as for a variety of promotions. Combined, free play has become the single greatest component of player reinvestment. The increased use of free play has also created unintended consequences. Free play has affected multiple departments within the casino including Slots, Marketing and Accounting. This article attempts to identify the emerging issues of free play and how they are impacting both the casino and the customer.

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Putting Problem Gambling in Perspective

The success of gaming development on Indian lands has allowed many tribes to explore the feasibility of replacing their aging, temporary buildings with new, amenity rich facilities. Despite the recession, tribes are moving forward with plans for future development. These developments, often in more accessible locations closer to population centers, often spark debate among various constituencies in the local community.

Any public debate on the pros and cons of casino development inevitably brings up the topic of problem gambling and its economic and social costs on the host community. Often these debates take place without a reasonable understanding of what problem gambling is, how prevalent it is and how significant the problem is when compared to other pathologies. These debates are frequently led by those who are morally opposed to casino gambling and it is that moral opposition that often clouds reasonable discussion. It is essential to clarify what problem gambling is, explore its prevalence in society, and compare its social and economic costs to other forms of aberrant behavior caused by what many see as more benign industries.

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Loyalty Costs

The terms “player reinvestment” and “player reinvestment rate” are often used to describe the costs associated with the suite of benefits that casinos bestow on their players. However, despite the frequency with which these terms are used, there is no industry-wide definition that describes the specific components that make up player reinvestment. To better understand how the industry defines player reinvestment, a survey was conducted among United States casino operators operating in a number of jurisdictions including Indian casinos, riverboat/barge casinos and Nevada casinos.

A key finding of the research was that in the evolution of most casinos, understanding what a property’s player reinvestment rate is does not become an important issue until two seminal events occur: 1) the casino institutes a host program and 2) it begins to mail out cash and free play offers to various segments of its database. Then, as discretionary comp costs and mail redemption costs rise, casino leadership begins to ask, “So what is our player reinvestment rate?”

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Rapid Customer Feedback

Few in the gaming industry would discount the importance of customer service. Indian casinos have long been at the forefront in designing and implementing customer service initiatives. Greeters and ambassadors, whose sole job is to make customers feel welcome, can be found at many properties. Many Indian casinos have instituted customer training programs and others have made a commitment to total quality management in an effort to create and maintain a great service culture.

Notwithstanding these efforts, casinos, like all businesses, are susceptible to the occasional service breakdown. A jammed printer coupled with a slow response time, a poor dining experience, a long wait at the valet can easily impact a customer’s perception of the gaming experience into one that is decidedly negative and negative service experiences can quickly become a reason for a customer to go elsewhere.

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Now is the Time to Prepare the Annual Marketing Plan

The period between the end of the Thanksgiving weekend and the start of the New Year’s holiday is traditionally one of the slowest periods in the casino industry. As such it is the ideal time for leadership to focus on the preparation of the property’s annual marketing plan. What better time to focus on the plan’s preparation than during a naturally slow period that precedes the New Year?

The importance of preparing the annual marketing plan must be underscored. First, the total sum of marketing and advertising activities can easily consume in excess of 20% of the property’s revenue. As such, there must be a plan in place that details how the casino will be marketed, which markets it will target and a forecast of the expected returns from those activities. The plan details realistic objectives and strategies that the casino will employ to achieve them and how much it will spend to reach those objectives..

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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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Don’t Shoot the Messenger

The recession of 2008-2009 has touched nearly every facet of American business. Indian gaming has not been immune from the sudden drop in consumer spending, which followed a rapid rise in fuel prices last summer. Nearly every US gaming market and the vast majority of casino enterprises operating in those markets saw declines in gross gaming revenue and net income, coupled with lower operating margins. Tribal governments in turn saw precipitous drops in revenue derived from their gaming operations and have been forced to reduce spending on essential services such as health care, education and elder care.

The sudden drop in the gaming revenue stream caught many tribal governments by surprise. Since budgeting often takes place in two to three year horizons, it quickly became difficult for many governments to meet their ongoing commitments. Unable to fully fund essential services, governments turned to their business enterprise boards who in turn looked to their casino management teams for solutions to very large and ultimately global business problems.

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Swapping Out Debt: Solving the riddle of debt-asset swaps and triangular deal structures

The riddle of “debt-asset swaps” is currently befuddling CFOs, public debt analysts, casino buyers and hedge funds.

All look to profit from discounted gaming company debt and the sale of distressed assets. Right now, there is a disconnect between a gaming company and its debt. On the one hand, the gaming company’s debt—whether $5 billion of publicly traded bonds or $50 million in privately held notes—is trading at prices that may be 10 cents to 70 cents on the dollar. On the other hand, the gaming company may be willing to retire that debt at face value, as part of its de-leveraging process.

The theory of a debt-asset swap is to take advantage of that disconnect. If one could purchase the gaming company debt at today’s steeply discounted price, and then present it to the gaming company for retirement at face value, then one should be able to profit greatly.

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Examining the Value of Free Play

The use of free play to stimulate demand and foster loyalty has increased dramatically over the past three years. Fueled by advances in technology, newer slot machines, more robust casino management systems and customer acceptance, free play has emerged as a formidable marketing tool for most casinos.

Free play is an umbrella term to describe non-negotiable slot credits that can be used by players for wagers on slot machines. While free play cannot normally be redeemed for cash, any winnings generated by those wagers can be redeemed or wagered again. Free play has essentially replaced cash in all but the largest prizes awarded to customers including bonus point redemptions, direct mail redemptions and a myriad of other demand stimulation programs such as bounce back offers, celebration jackpots and hot player awards. Some casinos even offer free play as a replacement for large scale cash premiums. Customer acceptance also appears high as even the least technologically adept players have figured out the procedure to convert bonus points or direct mail coupons into free play.

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