Cummings response to global gaming


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Cummings response to global gaming

  1. 1. Cummings Associates Cummings Response to Global Gaming Solutions, LLC’s Submissions Regarding Revenue Projections and Distance Issues December 13, 2010 135 Jason Street, Arlington, Massachusetts 02476Telephone: 781.641.1215 - Fax: 641.0954 - e-mail:
  2. 2. Cummings Response to Global Gaming Solutions, LLC’s Submissions Regarding Revenue Projections and Distance Issues I have reviewed the relevant portions of the following material submitted by Global GamingSolutions, LLC, as it relates to our differences regarding revenue projections and the effects ofdistance (and competition) thereon: o 20111109_Global_Gaming_Integrated_response_to_Consultant_follow_up_questions o GlobalGamingKS_-__Lotteryreviewboard_01December2010_(final) o KS_-_KansasRacingGamingCommission_FollowUpQuestion-ALL_07December2010 o 20101209_Global_Gaming_--_RevenueProjectionsAnalysis_08December2010 This response generally follows the last of these documents, as it appears to summarize, andin some cases extend, the main points of the previous submissions. I quote from the Global Gamingdocument(s) in blue Arial font, and my responses follow in black Times Roman.“We would ask the Review Board to carefully consider the case of Worth County, Iowa. . .Comparison results show that actual revenue generated was double that of the Cummings originalprojections. As you will see in the attached CBRE analysis, there are stark parallels between WorthCounty and Sumner County. . .” (letter of Michael Chang to Patrick Martin, December 8, 2010, page 1) I agree that I vastly underestimated the actual revenues of the new casino at Northwood inWorth County, Iowa (as did the applicant, Peninsula Gaming). I also agree that there are parallelsbetween Worth County and Sumner County. I would argue, however, that there are also parallels Cummings Associates
  3. 3. Cummings Response 2December 13, 2010with Waterloo, Iowa; Hoosier Park and Indiana Live in Indiana; and Dodge City, Kansas. These areall markets where distance matters in which I overestimated casino revenues. I believe it isinappropriate to cherry-pick among properties and/or markets, and I therefore base my projections ona range of experience that is as wide as reasonably possible. This experience includes the currentperformance of the Diamond Jo Northwood. (For additional comment on the Worth County experience, see pages 18-19 below.)“Cummings has acknowledged the following three points: 1. Our analysis on deconstructing his Gravity Model and what drives the gravity model assumptions is accurate. . .” (ibid., page 1) I recall saying that CBRE “did a good job.” I would not characterize their analysis as“accurate,” in particular with regard to the following point: “2. If you believed CBRE’s analysis of factors in the model that drive revenue differentials, then you would conclude as CBRE did that material differences attributable to a competitor’s attractiveness do not exist. . .” (ibid., page 1) At no time have I made any statement to this effect. CBRE in fact misunderstands the effectsof “power ratings” in my gravity models. I believe that the “other things” that cumulatively add up to“attractiveness” do matter, and are reflected appropriately in my models. There are materialdifferences in “attractiveness” between facilities, and these have substantial impacts in my models:for example, the Isle of Capri Kansas City (slot power rating 86) versus the other casinos in KansasCity, Missouri (101 to 106) – the resulting difference in win per slot per day is roughly 50%. Cummings Associates
  4. 4. Cummings Response 3December 13, 2010 “3. NO changes have been made to the Cummings Gravity Model since its use in the SumnerCounty bids in 2007/2008.” (ibid., page 1) At no time have I made nor acknowledged such a statement. For this year’s models, I have: 1. Updated demographic data. 2. Updated the locations of the proposed facilities (which differ slightly from those in 2008). 3. Updated travel times to those facilities, including direct access to that proposed by Peninsula at Exit 33. 4. Updated the “sizes” of all facilities represented in the model (numbers of slots and tables), both in Kansas and in all surrounding states. 5. Updated the power ratings of those facilities that report gaming revenues. 6. Revised (slightly) my assessments of the power ratings that I estimate for some competing facilities in Oklahoma based on my observations of their physical characteristics and volumes of patronage. 7. Revised my assessments of the power ratings that I expect for the new facilities, as documented in Exhibit 5 of my report. The fundamental relationships regarding the impacts of distance, size, and “attractiveness”(power ratings) remain unchanged. Cummings Associates
  5. 5. Cummings Response 4December 13, 2010“This year the differential appears to be 27%, though no changes in the model have beendisclosed.” (ibid., page 2) This year’s differential is indeed roughly 27% – in 2014 and 2016. At “full build,” it is only25%. I apologize for not “disclosing” updates 1 through 6 above. I thought they would obviously beessential for the current analysis.“Approximately half of the percentage difference can be attributed to distance (the extra 12 minutesto Exit 19), and the other half is attributed to the relative attractiveness of the competition.” (ibid., page 2) I disagree. Almost all of the percentage difference can be attributed to distance. The relativeattractiveness of the competition is the same whether you are at Exit 19 or at Exit 33. (The effects ofthat competition differ between Exit 19 and Exit 33, but that is largely a function of relative distance/ travel time, not attractiveness.)“Sometimes the common sense approach should prevail. The Cummings model assumes that‘revenue declines by 38% as distance from the population center doubles.’ What if one casino was1 mile from the population center and was projected to generate $100 million? Would a site onemile further away generate only $62 million?” (ibid., page 2 – italics in the original) The near-quotation from my report of November 23 omits a key qualification. What Iactually state on page 2 of my Appendix regarding methodology is: “I have analyzed such data from a wide variety of markets, other examples being presented inExhibits A-4 through A-11. Based on this type of data, I estimate that in general, over a reasonablerange of distances the aggregate “elasticity” of spending with respect to distance is roughly -0.7, that Cummings Associates
  6. 6. Cummings Response 5December 13, 2010is, consumers’ total spending declines in somewhat less than direct proportion to the distance to betraveled.” (italics added) I would not consider the difference between one and two miles to fall within such a“reasonable range.” I do have what I consider to be ample data, a portion of which is presented inExhibits A-6 through A-11, to conclude that the difference between 20± and 30± miles (which is therange most relevant here) does indeed have substantial impacts.“Distance matters, but common sense perspective on the distance differential would produce amuch smaller percentage difference . . .” (ibid., page 2) “Common sense” sometimes errs. I prefer to base my analyses on data regarding actualperformance.“There is no real world situation you can look at that provides actual data to prove the Cummingsmodel is accurate (or not), except possibly for Worth County.” (ibid., page 2) I do not understand why Worth County alone is relevant. In Exhibit A-17 of my report, Ipresent a comparison of my predicted versus actual results for a dozen facilities, all of which werelocated in markets where distance and competition were critical in different ways. I believe thisrecord demonstrates the accuracy of my models in general. I would again dispute the contention thatthe Worth County experience is “more parallel” to Sumner County than that of a dozen othermarkets. Cummings Associates
  7. 7. Cummings Response 6December 13, 2010“The distance relationship used by Cummings was created by market research (a survey) inMississippi. Additional analysis involved reviewing player’s club data.” (ibid., page 2)“The evidence that the State consultant uses to justify why the 38% rate of decline is applicable isbased on survey data it collected from Mississippi casinos and an analysis of players club data fromtwo anonymous casinos.” (undated CBRE report “Disproving the Exit 33 Myth. . .,” page 7) (page 33 of the .pdf file which begins with Mr. Chang’s letter) The latter statement, though presented in an undated report, appears to be source of theformer, as well as several similar statements regarding the bases for the distance relationships that Iuse in my models. As I quoted above from the Appendix to my report, “I have analyzed such datafrom a wide variety of markets, other examples being presented in Exhibits A-4 through A-11.”(italics added) Including the dozen cases cited in Exhibit A-17 of my report, I have conducted roughly 52studies which used gravity models to assess existing performance and/or develop projections forfuture gaming revenues. (Most of these were proprietary, and a few for facilities that did not getbuilt, and so do not appear in Exhibit A-17.) These 52 studies focused on roughly 76 markets ofinterest, and involved analysis of hundreds of markets containing even more hundreds of gamingfacilities. In most of these studies, I obtained some type of data (survey, players’ club, or licenseplate/bus count) regarding geographic origin of play for one or more facilities. While there are somefacilities that perform spectacularly well (Worth County, or L’Auberge du Lac in Lake Charles,Louisiana) or poorly (numerous riverboats in the Midwest), I have not seen any data which imply thatdistance matters very little. Cummings Associates
  8. 8. Cummings Response 7December 13, 2010“Both of those approaches require a lot of interpretation, and have some clear shortcomings.” (Mr. Chang’s letter, page 2) Agreed. I have spent fifteen years interpreting such data and applying it as described above.I am confident in the results. I would add at this point that my models are not alone in projecting a substantial difference inlikely revenues between Exit 19 and Exit 33. Wells Gaming Research, conducting a completelyindependent analysis, projects a difference that is even more substantial. Though the Wells modelsare proprietary, I believe that they are based upon analyses of other markets that are largely distinctfrom those that I have used in developing mine. The Wells results argue that, in this particular case,distance matters even more than I have found in my analyses.“CBRE suggested that we get some direct market research through a poll of Wichita residents.While it isn’t perfect, any data provides information that is valuable . . . the local market researchprovides a reasonable measure of public attitude on the issue of distance and its impact on gamingrevenues. . .” (ibid., page 2) I would disagree as to the value of “any data:” some data is at best irrelevant, and at worstmisleading. I agree that survey data provides a reasonable measure of public attitudes, but disagreestrongly that such (survey-measured) attitudes form a reasonable basis upon which to quantifyeconomic behavior such as spending at casinos already in operation, let alone yet to be built. The gapbetween consumers’ responses to surveys and their actual behavior is huge and highly variable.11 See, for example: Rachel A. Volberg, W. Lamar Moore, Eugene M. Christiansen, Will E. Cummings and Steven M.Banks, “Unaffordable Losses: Estimating the Proportion of Gambling Revenues Derived from ProblemGamblers,” Gaming Law Review, Volume 2, Number 4, 1998, pp. 349-360, and Cummings Associates
  9. 9. Cummings Response 8December 13, 2010 As one illustration, let us take the results of the survey conducted by Jayhawk ConsultingServices on December 3. As described on page 3 of Mr. Chang’s letter, this found that 33% ofWichita residents said they would visit a casino 30 minutes away an average of 4.65 times per year.If we apply these results to the adult population of Sedgwick County, we get: Adult population (21+) 322,694 (Cummings estimate) Would visit . . . x 33% (survey result) Times per year: x 4.65 (survey result) ---------- Total visits 495,174 I believe this severely understates likely visitation. My gravity models indicate that theresidents of Sedgwick County would make roughly 1,020,000 visits to the WinSpirit casino, morethan twice the volume suggested by the survey.“We have also provided data from our Riverwind Casino property located on I-35 highlighting themajority of customers travel in excess of 25 miles (or 30-minute travel time) from the metropolitanarea of Oklahoma City to this facility. This is despite the customers having closer alternatives.” (ibid., page 4) I do not recall seeing such data. The key parameter, however, is not “percentage ofcustomers” but rather rates of spending per unit of population. If 70% of their customers travel morethan 30 minutes, but provide only 50% of total (tracked) win (see below), while 80% of the totalpopulation of the immediate market lives more than 30 minutes away, I believe this would supportmy point, not theirs. Rachel A. Volberg, Dean R. Gerstein, Eugene M. Christiansen and John Baldridge, “Assessing Self- Cummings Associates
  10. 10. Cummings Response 9December 13, 2010 With regard to “closer alternatives,” I believe that Riverwind is second only to RemingtonPark in terms of accessibility to most of the Oklahoma City metropolitan area, far larger (2,000 slotsversus 750), and far more “attractive” (no table games at Remington Park, fewer amenities, andcasino on the second floor). My gravity models would therefore agree that Riverwind should obtainsubstantial volumes of patronage from customers who live closer to Remington Park.“Seventy percent of customers in our player tracking data base come to Riverwind Casino fromNorth of I-40 or farther away than 25 miles or a typical drive time of 30 minutes.” (ibid., page 4) Seventy percent of customers in a data base do not necessarily generate seventy percent of thewin. At my illustrative Casino Z, 56% of the customers in its data base reside more than 30 milesaway. These contribute only 24% of total tracked-player win. 76% of total tracked-player wincomes from the 44% who live within 30 miles. A pattern that shows the reverse, or even little variation with distance, would in myexperience be truly unique.“We also supplied CBRE’s analysis demonstrating that the relative attractiveness of NorthernOklahoma’s tribal gaming facilities was overestimated in the Gravity Model analysis, and if adjustedresults in a significant reduction in the revenue differential between Exit 33 and Exit 19. Theseadjustments were attributable to overestimating the Power Rating of slots and several otherfactors.” (ibid., page 4) CBRE made such an assertion. I have not seen any data which “demonstrate” that assertion.Reported Expenditures on Gambling,” Managerial and Decision Economics, Volume 22 (2001), pp. 77-96. Cummings Associates
  11. 11. Cummings Response 10December 13, 2010“Essentially, Mr. Cummings is saying in his assumptions on attractiveness that theOklahoma tribal casinos are better than ours.” (ibid., page 5 – bold in the original) Not true. I have estimated a slot power rating of 110 for the First Council casino at Chilocco,105 for Native Lights (primarily due to their rural setting), and 95 for the Kaw Southwind at Newkirk(despite its rural setting), versus roughly 111 for WinSpirit. The majority of other “typical” casinosin Oklahoma I have rated at 90-100. I have estimated the Oklahoma casinos’ table power ratings at50, versus 103 for WinSpirit. (And contrary to CBRE’s surmise, a one percentage point difference inpower rating generally results in roughly 3% difference in performance, location and size beingequal.) With these power ratings, I estimate that the three nearest casinos currently win roughly $60million per year as a group. This is consistent with my observations of rates of play when I visitedthem – twice. I would repeat my observation that physical attractiveness is only one element, and often aminor one, in the performance of a gaming facility. First Council and Native Lights are right on thehighway, you can park right at the door, they are clean, well-lit, offer nearly the full range of modernClass 3 slot product, and they are taxed at a rate roughly one-third of that which WinSpirit (or KansasStar) will pay. They can thus offer substantial player rewards programs. First Council will inaddition soon open a hotel, if it hasn’t already. I therefore believe they will indeed competeeffectively with the new Kansas casino in the geographic areas from which they are most accessible.My models agree with Global Gaming that their share of the Wichita market will be miniscule.CBRE’s assertions that my assumptions regarding their attractiveness are (a) wrong and (b) Cummings Associates
  12. 12. Cummings Response 11December 13, 2010responsible for a significant portion of the difference in revenues between Exits 19 and 33 aremisplaced.“As we have discussed in great detail, we operate travel plazas as an amenity targeted to anentirely different market which greatly enhances our total revenue picture. This causes Cummingsto make an attractiveness assumption that is inappropriately higher than justified in the market.” (ibid., page 5) I make my attractiveness assumptions independent of the philosophy by which GlobalGaming, or any other firm, operates its travel plazas. The “gasinos,” and some similar modestcasinos throughout Oklahoma, are packed because some customers like them. I believe that my pointis largely the same as Global Gaming’s: different strokes for different folks.“Cummings attempts to equate customers of a travel plaza to the general population within thearea, which is an inaccurate association. As a result, he applies a higher than appropriateattraction factor to tribal casinos in Oklahoma, which skews his assumptions in his revenueprojections.” (ibid., page 5) I used the Eastern Shawnee Travel Center, Peoria Gaming Center, and Little Turtle facilitiesto illustrate my contention that physical attractiveness does not a high-performing casino make.None of these are, by my observation, what I understand Global Gaming’s characterization of itstravel plaza to be: a facility located on a high-volume thoroughfare with substantial amenities fortruckers (and other travelers) who are traveling long distances and would not otherwise gamble in thearea. The “gasinos,” by contrast, are gas stations with a slot room attached, situated on rather modesthighways which serve primarily local traffic. The distribution of license plates among Oklahoma,Missouri and Kansas when I visited was almost exactly what my gravity models predict of local Cummings Associates
  13. 13. Cummings Response 12December 13, 2010residents, and the promotions that they advertised were clearly targeted toward frequent customers.Some other facilities without gas stations attached, such as the Osage Million Dollar Elm at PoncaCity, were indistinguishable. What does distinguish my examples is that there are “nicer” casinosnext door or just down the road. My point is that “nicer” casinos are not necessarily more“attractive” to all comers.2“Cummings appeared to assign a travel plaza revenue adjustment of $2.9 million and 20,000visitors. That adjustment, however, also included a deduction of $2.2 million because our project didnot include direct access. . . None of the previous exit 19 applicants proposed a travel plaza typedevelopment.” (ibid., page 5) My projections for WinSpirit “Frontage Traffic” are: 2012 (no travel plaza, no direct access, annual rate): $3.7mn win 34,000 visitors 2014 (with travel plaza, no direct access, annual rate): $6.6mn win 57,000 visitors -------------- ------------------ Effective “Travel plaza adjustment” $2.9mn win 23,000 visitors Note, however, that a portion of the $2.9 million increment in win is due to inflation. I do not fully understand the comment about “a deduction of $2.2 million.” I suspect it isrelated to Global Gaming’s perception of “incremental value” discussed below.2 To amplify this point further, there are many gaming facilities in the Northeast that look just fine andoffer all the usual amenities, but demonstrate (by my analyses) slot power ratings in the 80s. These arealmost all located in states that tax them quite heavily, leaving little for the operators to spend on playerrewards. Cummings Associates
  14. 14. Cummings Response 13December 13, 2010“This was a change in the methodology used in the previous round. The methodology changemeans the actual incremental value Cummings placed on the travel plaza was actually $700,000 inrevenues.” (ibid., page 5) I did not change the methodology. I still include a contribution from “frontage traffic.” Thatcontribution changed only slightly from my projections for the facilities in 2008 that did not include atravel plaza, resulting in what Global Gaming perceives as an “incremental value” of just $700,000.I would rather characterize the incremental value as $2.35 million in 2010 dollars, or $2.9 million inthen-year dollars, which is the assumption that creates the projections presented above. I reviewed the performance of facilities that I would consider comparable (see my final pointbelow), and decided that I had been overly generous at Exit 19 in 2008. As a result, despite theaddition of Global Gaming’s travel plaza, the resulting projection for the contribution from frontagetraffic is identical to that for the same exit in 2008. The $700,000 difference is due entirely toinflation (in 2008, I presented results in 2007$. In my current report, I present them in then-yeardollars). I would observe at this point that none of my projections for WinSpirit include direct accessfrom the Turnpike, with or without a travel plaza. None of the plans submitted by Global Gamingprior to the Board Meeting on December 1 showed such direct access.“This means approximately 8 million people in cars and trucks drive by Exit 19 every year.That population base is larger than Dallas-Fort Worth.” (ibid., page 6 – emphasis in the original) The traffic counts (see my final point below) indicate 14-15,000 vehicles cross the Kansas-Oklahoma border each day. At 1.5 passengers per vehicle, this amounts to roughly 8 million passers- Cummings Associates
  15. 15. Cummings Response 14December 13, 2010by. I would not, however, equate this to a “population.” On any given day, there are only 20,000±more people in the area than the number that live there.3 If these people are all adults, and were tovisit and spend money gambling at the rate that local residents do (roughly $800 per year at“Midwest Standard” rates with less than ten miles to a casino), they would add roughly $16 millionto total win. In contrast, the roughly 4.5 million adults in the Dallas-Fort Worth metropolitan area (totalpopulation = 6.5 million) would spend approximately $3.6 billion under the same conditions. Annual counts of people (or vehicles) passing by do not equate to population.“It is also a population base that the gravity model will never successfully predict.” (ibid., page 6 – emphasis in the original) Agreed, though as described above I would characterize it as a “source of customers,” not asa “population base.” That is why I add a contribution from drive-by traffic to the gravity-modelcalculations which are based on location of residence. We disagree as to the likely magnitude of thatcontribution.3 This is an aggressive estimate because some of the 20,000± passers-by do live in the area, and aretherefore already represented in the gravity models’ projections for local residents. Cummings Associates
  16. 16. Cummings Response 15December 13, 2010“. . . using our projected daily win per patron, the 300 trucks that are already stopping in theimmediate area would be the equivalent of $7 million in gaming revenues.” (ibid., page 6) I do not agree that each of these truckers will spend, on average, $64 each time they stop inthis area (300 x $64 x 365 = $7 million). While I concur that truckers are indeed a high-valuemarket, not all gamble, and those that do will not gamble at every stop.“In addition, for each 100 cars representing 150 patrons (1.5 passengers per car) would account foran additional $3.5 million in gaming revenue in its own right.” (ibid., page 6) We agree on the proposition that 100 cars that stop to gamble represent substantial amountsof gaming revenue. In Global Gaming’s view, this equates to roughly $9,600 in likely gaming winper day, or $3.5 million over the course of a year. My number is somewhat higher, at roughly$15,000 per day (in 2010$), or $5.6 million over the course of a year (those high-value truckers!) Where we disagree more substantially is on the number that will stop and gamble. Myprojection is for roughly 110 vehicles per day, or somewhat less than 1% of the passing traffic. Toobtain its projection of $10 million+, Global Gaming expects 3% or more to stop. I believe thatprojection is aggressive.“Difference (as predicted by Cummings’ Gravity Model): 27% (Reported as 22% in 2007/2008analysis with same assumptions. Why?)” (ibid., within table on page 7) As described on page 3, the underlying relationships that the gravity models embody are thesame in 2010 as they were in 2008. Many specific parameters, however, have changed, though most Cummings Associates
  17. 17. Cummings Response 16December 13, 2010to a very minor degree. The demographics are different, travel times have changed, the sizes of thefacilities have changed (more with respect to tables than to slots), and the competition fromOklahoma (and other) facilities has changed. Despite these modest updates (or rather, due to the fact that they are indeed modest), I wouldview my current projections as very similar to those I produced in 2008: 2008 Proj’ns (in 2016$) 2010 Proj’ns (in 2016$) (at Full Build) Exit 33 Harrahs: $220 million Kansas Star: $213 million Marvel: $165 million Exit 19 WinSpirit: $160 million Penn: $156 million“In effect, the Gravity Model says that gaming revenue declines by $3.6 million for eachmile, or $200,000 per 100 yards (the length of a football field). This prediction is notsupported by market research or by actual consumer behavior.” (ibid., within table on page 7 – emphasis in the original) I agree that $3.6 million per mile strikes us all as a high figure. It is, however, supported bythe market research and casino players’ club data that I have seen elsewhere, and by the performanceof my gravity models in the other applications that I have described. It will perhaps appear lessextreme when characterized as “2.6% per minute,” as I would prefer to view it, rather than in termsof dollars per mile. In some other markets (admittedly with greater competition as a contributingfactor), I have observed gaming revenues to decline by as much as five percent per minute of traveltime. Cummings Associates
  18. 18. Cummings Response 17December 13, 2010“First, we would note that about 1 in 5 (21%) residents of Wichita attended a casino to gamblewithin the past year. We have no frame of reference or recent past experience to know if that islow, high or about the average for a Kansas community.” (Jayhawk “Report of Public Opinion Survey: August 27 and 28, 2010,” page 3) (page 13 of the .pdf file which begins with Mr. Chang’s letter)“First, we found that, among the general public, about 18% had been to a casino within the lastyear. In other casino polling we have done around the state of Kansas, we would note that aparticipation rate of about 20% is very typical of a Kansas community.” (Jayhawk “Report of Public Opinion Survey: December 3, 2010,” page 3) (page 18 of the .pdf file which begins with Mr. Chang’s letter) I am curious as to the experience that Jayhawk obtained between August and Decemberwhich enabled that firm to characterize 20% as “very typical of a Kansas community” in its secondreport. I would moreover contrast these findings of 18-21% “within the past year” with those fromother jurisdictions. The American Gaming Association’s “2010 State of the States: the AGA Surveyof Casino Entertainment” reports that across the U.S. as a whole, 28% of adults had visited a casinoto gamble within the past year. For counties in which casinos were located, 42% had done so.(These findings are essentially identical to those of all recent-past such surveys of which I am aware.)These results speak clearly to me that distance matters, and Wichita is currently on the far end of thespectrum. Cummings Associates
  19. 19. Cummings Response 18December 13, 2010“. . . the Worth County casino competes with 19 tribal casinos across the border in neighboringMinnesota.” (“CBRE’s Analysis of: Cummings & Associates Track Record . . .,” page 22 of the .pdf file which begins with Mr. Chang’s letter) I disagree with this characterization. The map presented on page 25 of the .pdf file showsonly 11 casinos in the (large) portion of Minnesota that it depicts (the rest are in the far Northwest),and two of these are irrelevant (Canterbury Park and the “Riverboat Bingo Hall” offer no slotmachines). The vast majority of Minneapolis-Saint Paul casino patronage goes to just four gamingfacilities: Mystic Lake (just south of Minneapolis, with 4,000 slots), Treasure Island in Red Wing,and the Grand Casinos at Hinckley and Mille Lacs. On the other hand, the map does not show many casinos in Wisconsin nor a few in Iowa withwhich the Diamond Jo Worth competes. All this competition is at some distance, however, so Iultimately agree with CBRE (and Global Gaming) that this market shares significant similarities withSouth-Central Kansas in that there is essentially a monopoly of the central “core” with greatercompetition at a distance. Where South-Central Kansas differs is in the presence of roughly 322,000adults at 20± versus 30± miles, where my data indicate that distance matters very substantially.“After speaking with experts familiar with the situation in Iowa, it is likely that much of the revenuedisparity between Cummings’ projections and the actual result is due to significantly greateramounts of gaming spend from residents of Minneapolis-St. Paul and neighboring cities inMinnesota and those driving by the facility on I-35. Spending from these customer groups were notfully accounted for in the Cummings’ projection.” (ibid., same page) I agree that spending from Minneapolis-St. Paul and drive-bys were not fully accounted for inmy projections for Worth County. In particular, my projections at that time did not include a Cummings Associates
  20. 20. Cummings Response 19December 13, 2010significant contribution from drive-by traffic. (They now do, though Global Gaming argues that theyare overly conservative.) After speaking with other experts, however, and re-analyzing the market myself, I believethat these elements make only modest contributions to the exceptional performance of the DiamondJo Worth casino. Peninsula testified at the October 28 hearing, for example, that the Twin Cities areacontributed on the order of ten percent of its gaming revenues. My understanding is that nearby ruralareas and middle-sized towns contribute substantially higher volumes of business than I (or anyoneelse) initially projected, as well as the nearest “major” city, Rochester, from which the Diamond Jo isnearly equal in terms of travel time as its two closest competitors. My current analyses of Iowa markets indicate that the Diamond Jo Worth demonstrates a slotpower rating of 113, which is only slightly higher than that which I estimate for the WinSpirit casinoat Exit 19 (111). I therefore believe that the defects of my 2005 projection for Worth County, Iowahave been rectified as they might apply to Sumner County, Kansas.“The State consultant’s assumption is that a facility of the kind proposed in Sumner County wasnext door to one of the Oklahoma Border Casinos (with the same number of slots) that the SumnerCasino would only generate 22.2% more revenue than the typical Oklahoma Border Casino.” (undated CBRE report “Disproving the Exit 33 Myth. . .,” page 9) (page 35 of the .pdf file which begins with Mr. Chang’s letter) This is approximately correct, although CBRE’s understanding of the way in which mypower ratings work is rudimentary. I would emphasize again: physical appearance often makes onlya small contribution to the performance of a casino. Cummings Associates
  21. 21. Cummings Response 20December 13, 2010“The newer, $370 million L’Auberge du Lac generates nearly three times the win per slot machinethan the older Isle of Capri . . . Quite clearly, the estimated 22.1% difference in revenue (assumingno difference in location) between a new destination casino with excellent access in Sumner Countyand the typical Oklahoma border casino is at odds with numerous real world situations.” (ibid., pages 9-11) (page 36 of the .pdf file) The Lake Charles market in which L’Auberge du Lac and the Isle of Capri are locatedprovides the most extreme example of divergence between two comparably-situated facilities ofwhich I am aware. I have not had occasion to conduct a gravity-model analysis of this market, butwould guess that if I did so, Isle’s power rating at Lake Charles would be far worse than its facility inKansas City (86), and that of L’Auberge du Lac somewhat superior to those of the “Big Three” inKansas City (101-106). (The resulting range in slot win per day in Kansas City is from $169 to $262,a factor of 1.55. In Lake Charles, it is roughly 2.8.) I would nevertheless dispute CBRE’s conclusion. The “excellent access” for the newdestination casino in Sumner County is irrelevant – the gravity model adjusts for such access. Iwould argue that neither WinSpirit nor Kansas Star is likely to duplicate the truly exceptional successof L’Auberge du Lac, which has a grossly underserved market 2.5 hours away in Houston that theIsle facility evidently has great difficulty tapping into. On the other side of the coin, I do not believethat the relevant Oklahoma border casinos are nearly as “bad” as the Isle property in Lake Charles – itconsists of two old-style riverboats, which quite commonly have miserable power ratings. Thedifference between the facilities in South-Central Kansas and those on the Oklahoma border will inmy opinion be much less extreme than L’Auberge du Lac versus the Isle Lake Charles. And varying the relative “attractiveness” of the Oklahoma border casinos, as measured bypower ratings or otherwise, has little impact on my results. With the Kansas Star casino at Exit 33, Cummings Associates
  22. 22. Cummings Response 21December 13, 2010the border casinos’ share of Sedgwick County slot spending is projected at roughly 5%. WithWinSpirit at Exit 19, that share is projected at roughly 8%. (With either alternative in Kansas, tablespending in Oklahoma would be negligible.) If you were to reduce these estimates to zero, thedifference that my models project in total revenues for Exit 19 versus Exit 33 would decline by onlya few percentage points.“Traffic Volume Map,” provided by Wilson & Company (page 62 of the .pdf file which begins with Mr. Chang’s letter) The data on this map are consistent with those I obtained from the Kansas and OklahomaDepartments of Transportation and used to develop my estimates for frontage visitation. The trafficcounts of 14,000-15,000 per day on the Turnpike are very similar to those on I-35 in Iowa where itpasses by the casinos at Lakeside and Northwood (Worth County). Lakeside has a full-scale travelplaza; the Diamond Jo Worth has a gas station plus parking for truckers. I am very familiar withthese casinos (as well as the one at Prairie Meadows, where traffic counts are higher due to localcommuters, and several travel plazas are slightly down the road) and have factored my assessment oftheir capture of drive-by traffic into my projections for Sumner County. I am also familiar with the Acoma and Laguna casinos in New Mexico on I-40, and the SanFelipe casino on I-25 between Albuquerque and Santa Fe, and have analyzed New Mexico marketsin detail. The Acoma and Laguna facilities attract very high volumes of drive-by traffic; the SanFelipe casino relatively little. I believe that the success of the Acoma and Laguna casinos is due tothe fact that there is no competition for such business for long stretches of I-40 to the east (Texas)and west (only the new Navaho casino near Gallup, then nothing on I-40 in Arizona). They are Cummings Associates
  23. 23. Cummings Response 22December 13, 2010therefore not appropriate parallels for South-Central Kansas, where long-distance traffic will passnumerous casinos in Oklahoma to the south, and in Kansas City and Iowa to the north. Cummings Associates