How to Care for and Feed the Golden Goose
Casinos face unique challenges in order to maintain profitability and remain competitive under the new paradigm of falling economic conditions. These factors are made more difficult in the commercial gaming sector due to rising tax rates and in the Indian gaming sector due to self-imposed tribal general fund contributions and/or per capita distributions. There is also a growing trend towards state-imposed fees.
It is difficult to determine how much to “render to Caesar” while keeping the funds available to grow market penetration, maintain market share and improve profitability. This must be done well.
This article discusses how to plan and prioritize casino reinvestment strategies.
The Cooked Goose
It would seem obvious not to cook the goose who lays golden eggs. However, it is surprising how little attention is given to its ongoing proper care and feeding. Developers/tribal councils, financiers and investors are all eager to reap the benefits of a casino. There is also a tendency to not allocate sufficient profits to asset maintenance & enhancement. This raises the question of how much profit should be reinvested and for what purposes.
There are no set rules because each project is unique. Most of the big commercial casino operators don’t distribute net profits to stockholders as dividends. Instead, they reinvest the funds in improving their existing venues and seeking out new ones. These programs may also be funded by additional debt instruments or equity stock offering. These financing options will be more prominent due to the lower tax rates for corporate dividends. However, the core business must maintain its prudence and continue to reinvest.
Profit Allocation
The net profit ratio, which is earnings before income taxes & deductions, for publicly-held companies was 25%. This average figure includes gross revenue taxes, interest payments, and group income. On average, nearly two-thirds of remaining profits are used for asset replacement and reinvestment.
Low-tax jurisdictions that allow casinos to reinvest in properties are more likely to have them. This will increase revenues and eventually help the tax base. New Jersey is an example of this, since it requires certain reinvestment allocations as a revenue stimulant. Illinois and Indiana, which have high