An Analysis of Gaming News and Trends by Ken Adams
Second Quarter 2019
Have We Run Out of Room?
Casino gaming in the United States has been expanding continually for thirty years. In 1988, congress passed the National Indian Gaming Regulatory Act. The Act legalized Indian gaming which began to spread across the country almost immediately. The NIGRA and the start of Indian gaming was followed in close order by riverboat casinos and limited stakes gaming. With this expansion, the negative attitude toward gaming turned progressively more positive. That change opened the floodgates and casinos started popping up everywhere. After three decades, the expansion is slowing, but not before commercial gambling has become big business, generating billions of dollars in revenue and taxes.   The Center for Gaming Research at the University of Nevada Las Vegas reported the total gambling revenues in 2017 were $158.54 billion. The total includes commercial casinos, tribal casinos, card rooms, lotteries, legal bookmaking, pari-mutuel wagers and charitable gambling games.
Counting both commercial and tribal operations, there are approximately 1000 casinos in this country with a combined revenue approaching $80 billion a year. The numbers are staggering, especially considering that 80 percent of those operations have operated for less than twenty years. While few industries experience such dramatic and rapid growth, there are limits to any industry’s ability to grow and expand. Expansion for the casino industry requires new jurisdictions but there are only a few states remaining that do not have legal casinos .   Organic growth is dependent on new customers or added spending by existing customers.  The number of potential customers is determined by population size and competition. Besides a finite number of customers, customer spending is derived from disposable income, also a finite source. Casinos compete with non-essential retail, restaurants, entertainment, sports and leisure for that disposable income. 
The casino industry is being slowly squeezed between the decreasing number of opportunities for expansion and a limited number of customers. In a report to the Louisiana Gaming Commission, Spectrum Gaming quoted Albert Einstein as saying, “The solution to saturation is expansion.” Einstein was talking about physics, not gaming.  However, the quote could have been applied to gaming in the past.  Traditionally, when any market has become saturated, the casino operators have sought to move into new jurisdictions. That strategy worked successfully for the forty years since Harrah’s, Caesars and Steve Wynn first went to Atlantic City.
Historically, as the opportunities for expansion decreased, the major gaming corporations started to pursue a strategy of acquisition and merger. That strategy has resulted in a handful of companies dominating the industry and controlling the key markets. MGM, Caesars, Boyd, Eldorado, Penn, Churchill Downs, Golden Nugget and Hard Rock are the major players. Over the last ten years, those corporations have gobbled up anything and everything available in efforts to grow corporate revenues. 
The opportunity present by acquisitions is not risk-free. An expansion driven, acquiring company sometimes becomes unwieldy and debt-ridden, forcing it into bankruptcy and/or breakup. Caesars, formerly Harrah’s, is a prime example. Harrah’s led both the expansion and the acquisition movements. Now Caesars may be pushed into selling off assets and withdrawing from some jurisdictions. Under pressure from Carl Icahn, its largest shareholder, Caesars is up for sale. It may or may not go in one piece to another company, but it is highly unlikely the company will survive in its present form. There are several potential bidders for the entire company; Tilman Fertitta, owner of Golden Nugget Casinos, Landry’s and Eldorado Resorts are thought to interested in all of Caesars’ assets. The owner of Treasure Island in Las Vegas, Phil Ruffin, has expressed interest in buying the Caesars’ properties on the Las Vegas Strip. Most gaming companies are watching from the sidelines hoping to pick up some of Caesars’ key assets.
Clearly, acquisition is also a limited strategy. In this country, there are only so many viable casino companies or individual casinos to acquire. When that limit is reached, a new strategy is needed to satisfy the stock market’s voracious appetite for quarter-on-quarter growth. Wall Street and a generation of very active investors demand constant improvement in cash flow and stock value. That often drives major change in corporate strategies. The beginning of a new strategy is visible; MGM, Caesars and Eldorado are restructuring and reducing expenses. Caesars is attempting to reduce its expenses to make it more attractive for a buyer. Driven by Icahn, Caesars is looking for $80 million in improvements. MGM is doing the same thing also pushed by very active investors. The investors believe MGM is underperforming and undervalued. MGM plans to lay off 1000 people over the course of a year to reduce its expenses by $200 million. It also plans to cut other expenses for an additional $100 million in savings. The New York Post reports that Eldorado is trying to cut $500 million in expenses. To achieve that number, Eldorado will have to make some deep cuts, not just in payroll, but corporate structure, marketing, capital expenses including maintenance, property updates and even slot machines. The Pos t says Eldorado wants to make itself more attractive to lending institutions so that it can make a bid for Caesars.  Bankers can put as much or more pressure on a company to change directions as investors.
One of the outcomes of rapid expansion, acquisition and mergers is a dramatic increase in corporate expenses and that makes both lenders and investors uncomfortable. The acquiring company ends up with a duplicate corporate structure, one from each company in the transaction. As part of the process, investors are usually promised a boost to cash flow from the elimination of duplication.  It can result in significant increases in cash flow in the short-term. However, once the process is complete, there is usually not a lot of fat left to be cut. If not before, by the next quarter the lenders and/or the stockholders will be clamoring for more; at that point they want all of the expenses to be reassessed.  
The process of restructuring is more than a limited corporate strategy designed to please Wall Street analysts and investors. It is becoming an important national trend at the operational level; it might be more accurately called rightsizing or market adjustment. The expansion of casinos into every state is leading to saturation in some places. The most glaring example is Atlantic City. The city lost half of its customers and revenue to neighboring states in a ten-year period. Five casinos in Atlantic City closed in 2014-15 as the casino companies struggled to adjust to the competition. In 2018, Hard Rock and Ocean Resorts opened, but failed to grow the market.   The revenue of Hard Rock and Ocean Resorts came at the expense of the existing casinos.  The new casinos added 4000 slots, too many for the market. The other casinos responded by reducing their inventory by 400 slots. It is only a matter of time before there is further adjustment; it is probable that at least one casino will close in the next 12 to 24 months. Additional adjustments are necessary for the long-term survival of the industry in Atlantic City. 
In the Midwest and East Coast regions, the trend of downsizing operations is very noticeable. It is two-sided. While the number of gaming opportunities increases in some venues, the number of slot machines is forced to decrease in other venues. In Illinois, for example, as the number of VLTs increases, the number of slot machines in casinos decreases. Between 2017 and 2018, the casinos in Illinois reduced the number of slot machines by 2.2 percent to 9700. During the same period, the number VLTs increased by 8 percent to 30,600. The long-term trend is even more pronounced, since January 2013, the number of casino slots has fallen from 11,300 to the current 9,600, while the number of VLTs has increased from 3,381 to 31,400. 
Indiana is also being pressured from the VLTs in Illinois and additionally from the casinos and racinos in Ohio. Since 2013, casino win in Indiana has dropped by 12 percent and the number of slot machines has fallen by 15.2 percent .  In Ohio, the casinos are losing market share to the racinos and in response are reducing the number of slot machines.  Casino and VLT operators in New York are discovering the market is much smaller than predicted. In the last two years, four casinos have opened. They are all underperforming and are attempting to adjust. For example, Resorts World Catskills’ revenue is 45 percent below expectations; consequently, Resorts has asked the state for permission to reduce its slot machine inventory by a fourth. The state’s racinos, in response to the new casinos have also been taking slot machines off the floor.
The casinos in Maryland, Pennsylvania, Rhode Island, Louisiana and Mississippi either are, or will be, making major adjustments. The restructuring and rightsizing under the pressure of additional competition resembles the national trend of corporate restructuring due to the loss of growth opportunities. Those conditions are leading to a serious examination of expenses at both the corporate and operational level. Those adjustment strategies can be expected to increase as the industry digests the reality of excessive competition and market saturation. The casino industry has nearly reached the point wherein there are too many casinos and too few gamblers, the point of saturation; not quite, but close. 
There is still limited expansion taking place. Arkansas is just beginning casino gaming. Indian tribes in California are opening more casinos and the existing Indian casinos are dramatically increasing their investments and marketing efforts. Wynn Resorts is going to open a $2.6 billion casino just outside of Boston, Massachusetts. And of course, sports betting is expanding at warp speed. The dismantling of Caesars will create opportunities for other companies to acquire new properties and enter new jurisdictions. 
The top tier companies like Eldorado, Golden Nugget, Hard Rock, Foxwoods and Mohegan Sun, are seeking additional properties and a presence in more markets. Those corporations are looking outside of the country. Japan is the most attractive new jurisdiction in the world and every large gaming company has expressed interest.  And there is a second tier of smaller gaming companies that still have considerable opportunity to expand and merge. Those opportunities, however, are a small percentage of what existed a decade or two ago.
Farsighted observers predicted the day would come when there would be no more opportunity for expansion and most casino markets would have too many casinos for the demand. That day is getting much closer. Over the course of 2019, it will become clearer just which companies and which states have run up against that wall. MGM is giving us a peek into the process of corporate restructuring after decades of expansion and Illinois is showing us what market adjustment looks like. Both scenarios will be played out on other stages as we move closer to that point of total saturation.

But that is just my opinion, isn’t it?

Ken Adams