Andrew Tottenham - August 26, 2014

Why is it just so difficult?


There have been, in the past few years a number of initiatives to develop large scale casino destination resorts. The success or failure of these initiatives is usually a matter of geography. In Asia they have, thus far,been hugely successful. I am not talking about the commercial success of the facility but of the initiative; the fact that the governments got the laws passed and the operators got projects off the drawing board and constructed. In the US, these initiatives have not been entirely 100% successful (Florida, New Hampshire) but many states have legalised casino gambling and enacted laws and regulations to enable the large scale projects that are common in the USA. In fact, so common are they that over supply in some regions is leading to many casino resorts to cut back on staffing or ultimately closing; as Caesars did in Mississippi earlier this month. And yet in Europe we just cannot seem to get one of these mega resorts off the ground. This makes me ask why.

It appears to me there are a number of reasons, mainly to do with politicians, incumbent industries and finance. This article deals with the last point; I will address the other points in forthcoming articles. Apart from their trading operations, which they do not really understand, the financial industry is not generally known for taking risks. Leading investment banks have a franchise and do not want to risk their good name by raising money for what may turn out to be a bad investment. In order to determine whether a project is a good or bad investment their analysts look at analogies. For example, when analysing the potential for a new project in Massachusetts they compare populations, socioeconomic data, location and other relevant factors to that in another State and from that extrapolate what they believe the visitation, spend per visit, etc. at the proposed facility. However, in Europe they don’t have anything similar to compare it to. They also have a mantra, “Europeans don’t gamble”.

Europeans DO gamble, and do quite a lot of it. On a per capita basis the amount spent on gambling in the US is broadly similar to that of Europe. The difference is what they spend it on. In Europe, lotteries are the product of choice; we spend about €35 billion annually on lotteries, a little less than €70 for each person. In the US, the net revenues are approximately 50% of this amount. When it comes to casinos the US generates over eight times the casino revenues compared to Europe; €55 billion versus €6.5 billion. However, Europe’s betting, AWP (low stake low prize “amusement”) machines and remote gambling/betting markets are significantly bigger. Why do Americans spend more on casino gambling than Europeans? My answer is product. Generally, the product in the US is far superior to that in Europe. High taxes and heavy handed regulation in Europe encourage a market in small casinos and mitigate against large destination casinos/resorts. High gaming taxes do not allow the investor/operator to invest in his product with the result that casinos become a marginal activity. The smaller a facility the smaller it’s geographic reach. It is not a linear equation as,at some point, increasing scale (investment) boosts the facility’s appeal and attracts a greater market; twice the investment more than doubles the potential market area. The following illustrates the point:  A small fair on a village green will attract people from that village and possibly the surrounding villages. If the scale is increased people will travel from further afield and when it is a major amusement park they will travel across country (some from even across Europe) to ride the rides.

Many years ago, when Native American gaming was in its infancy and my consulting business was a few years old a man came into my office and talked about a lot of things but nothing in particular. After he left I scratched my head and tried to work out why he had come to see me. He left me some information about his company and as I read it all became clear. He was distributing and financing slot machines to Native American tribes on a participation basis ( only those that were compacted I should add).  It was clear that he was running out of money; sales were very strong and the revenue returns were spectacular but he was selling machines faster than he could collect the money to pay for them. The manufacturer was unwilling to extend further credit and so he needed additional sources of finance.

I decided to go and take a look at what was happening. My first visit to a Native American casino was Jackpot Junction in Morton, Minnesota. At the time they had a facility with almost 1,000 slot machines in a potato field (I kid you not), in the middle of nowhere. The casino was jammed and it was a Thursday night. A quick inspection of the car park revealed car and bus license plates from all over the mid-west. Visits to other tribal casinos showed the same level of demand.

Given what I had learnt I thought I would see if I could arrange finance for slot machines on Native American reservations. At this time my colleague was approached by a North American tribe, they wanted $50 million to expand their existing bingo facility and add a casino. We decided to pool our efforts and see what we could do. We visited all the major investment banks and sources of lease finance in New York and sometimes encountered genuine concerns about perfecting a security on an asset that would be sited on a reservation. But more often than not we encountered the same or similar questions from the Titans of Wall Street, “who would go there to gamble”? “Do people in that state gamble”? “Yes, it was true that people are travelling to Atlantic City in their millions but…..” It was as if every investment banker had read a report and that became the “perceived wisdom” of the moment. No matter what we said we couldn’t get past the idea that Americans do not gamble.

Well, to cut a long story short, we were not successful in assisting that Tribe but another company stepped up to the plate and provided the capital. Today that bingo hall is Foxwoods, the largest casino in the world! What happened to the machine distributor? He overcame his cash flow problem, ultimately took his company public and became a very wealthy man.

My point being that in order that one of these large, European destination casino resort proposals to become a reality it will require a company with very deep pockets for the management and the equity and an investment banker with vision beyond his annual bonus. Finding the former is relatively easy but where do you find the latter?

First published in Infinity Gaming Magazine, May 2014