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GENERAL ECONOMIC
PRINCIPLES AND THE
LOTTERY GAMING FACILITY
BIDS
A presentation to the State of Kansas Racing and
Gaming C...
GENERAL OBSERVATIONS ON
THE CONSULTANT REPORTS
• Review Board has been charged with selecting
projects that will
– maximiz...
GENERAL ECONOMIC PRINCIPLES
AND CASINO INDUSTRIES
• A high proportion of customers and gaming
revenues will come from the ...
OTHER ECONOMIC FACTORS
• The gaming products found in casinos (slot
machines, table games) are highly commoditized
– Conve...
ECONOMIC AND FISCAL
IMPACT ISSUES
• Since local customers are more “gaming centric,”
they will have only limited impact on...
GENERAL ECONOMIC OBSERVATIONS
ON THE SOUTHEAST ZONE
• When law was passed, reasonable to build a casino
in Southeast Kansa...
GENERAL OBSERVATIONS ON THE
GENERAL STATE OF CASINO MARKETS
• Unprecedented increases in gasoline prices and airline ticke...
STOCK MARKET PRICE TRENDS FOR
MGM, WYNN, LVS, BOYD
2007-2008
A NUMBER OF MAJOR GAMING STATES
ARE BECOMING INCREASINGLY
CONCERNED: NEVADA
NEVADA YEAR OVER YEAR GROWTH RATES, SAME
MONTH...
PROBLEMS ELSEWHERE:
ATLANTIC CITY
ATLANTIC CITY: YEAR OVER YEAR GROWTH RATE,
SAME MONTH PRIOR YEAR COMPARISON 2001-2008
-1...
ILLINOIS YEAR OVER YEAR GROWTH RATES, SAME
MONTH PRIOR YEAR COMPARISON 2000-2008
-25.00%
-15.00%
-5.00%
5.00%
15.00%
25.00...
CONNECTICUT TRIBAL CASINOS YEAR OVER YEAR
GROWTH, SAME MONTH PRIOR YEAR 2001-2008
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.0...
MICHIGAN YEAR-OVER-YEAR GROWTH RATE, SAME
MONTH PRIOR YEAR COMPARISONS 2001-2008
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00...
SMOKING BANS HAVE BEEN
SURPRISING IN THEIR IMPACTS
EFFECTS OF SMOKING BANS ON GROWTH
RATES OF GAMING REVENUES
VARIOUS JURI...
GENERAL ECONOMIC OBSERVATIONS
ON THE SOUTH CENTRAL ZONE
• Regional monopoly casino => nearest competing
(Oklahoma tribal) ...
COMPARATIVE STRENGTHS AND
WEAKNESSES OF THE COMPETING
PROPOSALS
• Capabilities of the applicants to deliver on their
promi...
Zone 1 & 2 presentation 7 24-08
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Transcript of "Zone 1 & 2 presentation 7 24-08"

  1. 1. GENERAL ECONOMIC PRINCIPLES AND THE LOTTERY GAMING FACILITY BIDS A presentation to the State of Kansas Racing and Gaming Commission Review Board by William R. Eadington, Ph.D. July 24, 2008
  2. 2. GENERAL OBSERVATIONS ON THE CONSULTANT REPORTS • Review Board has been charged with selecting projects that will – maximize revenues for the State of Kansas – enhance tourism and economic development in Kansas or its geographic regions, and – be in the best interests of the citizens of Kansas. • Consultants’ findings and conclusions based on – their experience & expertise – descriptions presented in the proposals – facts and data drawn from their own research, and – the conceptual and empirical models consultants have applied to their analysis • Complex issues => Board should ask questions as they come up during Consultant Presentations
  3. 3. GENERAL ECONOMIC PRINCIPLES AND CASINO INDUSTRIES • A high proportion of customers and gaming revenues will come from the local/regional market, within a 100 mile radius of the gaming venues • Distance makes a difference => The closer a customer is to a casino, the greater the aggregate spend per annum at that facility • Casino markets that attract a substantial portion of their clientele from beyond 100 miles usually have significant non-gaming amenities (i.e. outdoor recreation options, scenic attractions, entertainment offerings, or unusual retail, hotel and restaurant outlets.) They also tend to have casino “clusters” – LV, Reno, Tahoe, Palm Springs, Niagara Falls, Biloxi, Atlantic City • Restricted markets (monopolies) can create substantial profit opportunities that can prevail for relatively long periods – Certainly the case for Sumner County
  4. 4. OTHER ECONOMIC FACTORS • The gaming products found in casinos (slot machines, table games) are highly commoditized – Convenience, pricing are the dominant considerations • The challenge, therefore, is for a casino company to create good reasons for customers to come to their facilities rather than competitors • Differentiation can occur with ambience, theming, branding, scale, entertainment, non-gaming amenities, loyalty programs, complementary policies, hosting, etc. • The closer the consumer is to the casino, the more “gaming centric” the consumer is likely to be – Non-gaming amenities are more attractive to distant visitors (tourists) than to locals
  5. 5. ECONOMIC AND FISCAL IMPACT ISSUES • Since local customers are more “gaming centric,” they will have only limited impact on businesses outside the casino complex – Major economic impacts are more related to employment and increased incomes • “Net Economic Impact” is the employment and revenue gains from a particular project being developed – These come from “exports” and “import substitution” – Distinguish from “cannibalization” of other local business, via redirected spending • Fiscal impacts take into consideration increased demands for public services and infrastructure v. new sources of tax revenues for state and local governments
  6. 6. GENERAL ECONOMIC OBSERVATIONS ON THE SOUTHEAST ZONE • When law was passed, reasonable to build a casino in Southeast Kansas with a CAPEX of $250 m + • However, Downstream Casino => $300 m+ – 2,000 slot machines – 45 table games – 15 poker tables – 12 story, 226 room hotel • Market may not support Downstream, let alone another casino of similar size – Merrill Lynch projected $140 m in TR; Wells & Cummings considerably less – Kansas casino would have a substantially greater effective tax rate (27% v. 6%) – Strategic dilemma for Penn National Cherokee => request “phasing in” to get to their $250 million required CAPEX
  7. 7. GENERAL OBSERVATIONS ON THE GENERAL STATE OF CASINO MARKETS • Unprecedented increases in gasoline prices and airline ticket prices, as well as increasing food prices – Family budget constraints are more important than in prior years – This affects some households much more dramatically than others • Low levels of consumer confidence with respect to the National economic outlook – Declines for past 6 months; lowest level since 1990 – Consumers in general are going to be more cautious about discretionary spending under such circumstances • Corporations are typically much more cost conscious in recessionary times => Less generous for expense account conventions in Las Vegas or elsewhere • The sub-prime mortgage crisis has adversely affected specific groups in society who are no longer able or willing to participate in the marketplace – Households who are in, or facing, foreclosure – Construction workers, realtors, others in financial services – Others who fear job loss or related cut-backs in income
  8. 8. STOCK MARKET PRICE TRENDS FOR MGM, WYNN, LVS, BOYD 2007-2008
  9. 9. A NUMBER OF MAJOR GAMING STATES ARE BECOMING INCREASINGLY CONCERNED: NEVADA NEVADA YEAR OVER YEAR GROWTH RATES, SAME MONTH PRIOR YEAR COMPARISONS 2001-2008 -20.00% -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% January-01 January-02 January-03 January-04 January-05 January-06 January-07 January-08
  10. 10. PROBLEMS ELSEWHERE: ATLANTIC CITY ATLANTIC CITY: YEAR OVER YEAR GROWTH RATE, SAME MONTH PRIOR YEAR COMPARISON 2001-2008 -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
  11. 11. ILLINOIS YEAR OVER YEAR GROWTH RATES, SAME MONTH PRIOR YEAR COMPARISON 2000-2008 -25.00% -15.00% -5.00% 5.00% 15.00% 25.00% 35.00% Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 ILLINOIS RIVERBOAT CASINOS
  12. 12. CONNECTICUT TRIBAL CASINOS YEAR OVER YEAR GROWTH, SAME MONTH PRIOR YEAR 2001-2008 -20.00% -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 CONNECTICUT TRIBAL CASINOS
  13. 13. MICHIGAN YEAR-OVER-YEAR GROWTH RATE, SAME MONTH PRIOR YEAR COMPARISONS 2001-2008 -20.00% -10.00% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 POSSIBLE EXCEPTION: DETROIT (MGM up 19.0%, or $45 million, for first 6 months of 2008)
  14. 14. SMOKING BANS HAVE BEEN SURPRISING IN THEIR IMPACTS EFFECTS OF SMOKING BANS ON GROWTH RATES OF GAMING REVENUES VARIOUS JURISDICTIONS -35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% Year Before First Year Second Year Third Year Victoria,Australia Saskatchewan New Zealand Washington (non-tribal) Delaware
  15. 15. GENERAL ECONOMIC OBSERVATIONS ON THE SOUTH CENTRAL ZONE • Regional monopoly casino => nearest competing (Oklahoma tribal) casinos will be at least fifty miles away – Monopoly profit potential • Competitive bidding process: proposals try to preserve a portion of the monopoly profits, but with proposed attractions and amenities to gain comparative advantage – Challenge is to win the bid without giving up too much profit potential • Local customers more influenced by gaming offering; tourists will be drawn more by non-gaming amenities – What is it about this casino that would make me want to visit it rather than my other choices?
  16. 16. COMPARATIVE STRENGTHS AND WEAKNESSES OF THE COMPETING PROPOSALS • Capabilities of the applicants to deliver on their promises – Financial status – track record – Processes and incentives (for customers, employees, management) • What does the applicant really bring to the Zone and the State? – Brands, player lists, cross-marketing capabilities – Excuses for locals and tourists to visit their facility • What are the comparative strengths of applicants to attract local visitors? To attract tourist visitors? – Role of distance; role of non-gaming amenities
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