Why The Pennsylvania Casino Industry Can Count On A Bright Future

May 15, 2016
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A recent study by the State University of New York’s (SUNY) Nelson A. Rockefeller Institute of Government draws the conclusion that Pennsylvania’s casino industry lacks long-term sustainability.

The study, titled Short-Term Relief, Long-Term Disappointment, was conducted by Lucy Dadayan. PAOC contributor Dustin Gouker reported on the study’s findings here.

What the study says about gambling, and PA

In part the study reads:

“New gambling activities may generate short-run increases in public revenues, but these increases are getting smaller and their duration shorter, perhaps as more and more states compete for a limited pool of gambling dollars.”

Pennsylvania is the focus of the study, as the state has so far managed to avoid the pitfalls that have weakened other casino markets across the country. According to the study, chief among the issues casinos are facing in other locales is over-saturation, both in-state and out-of-state.

As the study states:

“The recent geographic expansion of gambling created stiff competition, particularly in certain regions of the nation where states and facilities are competing for the same pool of consumers. Therefore, the weakening of the growth in gambling revenues is also attributable to market saturation and industry cannibalization. For example, Pennsylvania enjoyed strong growth in revenues from casino and racino operations until the opening of new casinos and racinos in neighboring Maryland, New York City, and Ohio.”

The study is very detailed, informative, and a good reference for anyone in the casino or gaming industry.

That being said, some of the conclusions seem to be a classic case of the old maxim, correlation does not imply causation.

I’m far less pessimistic about Pennsylvania’s casino industry than the study’s author. Here is why.

Early growth is easy

If we look at the two mature regional markets that best resemble Pennsylvania — Connecticut and Mississippi, both of which sprang into being around the same time — we see a clear growth trend.

Fast growth early on (generally lasting about three years) due to the newness of the market, followed by a period of modest growth, and finally leveling off with periods of incremental growth or decline.

Compare and contrast Connecticut, Mississippi and Pennsylvania

When Foxwoods opened in 1993, it saw three years of solid growth, followed by a period of slower growth and then a leveling off period in their slot handle (the only measure we have access to):

  • 1993/1994: $4,500,394,282
  • 1994/1995: $6,609,160,687
  • 1995/1996: $7,804,174,844
  • 1996/1997: $8,146,374,915
  • 1997/1998: $8,445,216,386
  • 1998/1999: $8,656,969,881
  • 1999/2000: $9,213,272,252
  • 2000/2001- 2005/2006: $9.4 million to $9.9 million

In Mississippi we see a similar trend over the same period of time:

  • 1993: $789,835,710
  • 1994: $1,462,794,645
  • 1995: $1,724,343,005
  • 1996: $1,862,046,330
  • 1997: $1,984,366,844
  • 1998: $2,174,201,185
  • 1999: $2,516,246,218
  • 2000-2004: $2.65 million to $2.78 million

During a speech at G2E in September of 2014, Steve Wynn discussed how regional casinos are more tied to economic conditions than larger destination resorts located in major population centers with international airports.

Following the recession of 2008, the regional casino industries in both states seemed to be, as Wynn stated, at the whim of the economy. Because they had already matured and leveled off, they were more sensitive to outside factors such as new competition.

What we have in Pennsylvania is a similar regional market and a similar early growth trend. What we don’t know is what impact a recession would have on the industry (although it appears to have at least stunted growth). Pennsylvania was still in its rapid growth phase in 2008, whereas Connecticut and Mississippi were already mature markets.

Following its period of quick growth, the Pennsylvania casino industry has leveled off, much like Connecticut and Mississippi before it. It should be noted that Pennsylvania’s period of early, fast growth was extended (for what looks to be two years) by the addition of table games in 2010.

  • 2007: $1,039,030,723
  • 2008: $1,615,565,758
  • 2009: $1,964,570,480
  • 2010: $2,486,408,061 (table games introduced)
  • 2011: $3,024,772,959
  • 2012: $3,158,317,863
  • 2013: $3,113,928,591
  • 2014: $3,069,077,597
  • 2015: $3,173,787,012
  • 2016 [on pace for]: $3,345,171,510

The upshot: Competition is certainly a factor, but the success of regional casinos seems driven by economic conditions.

Non-gaming revenue

The study uses the term “substitution” to describe how people might choose to divert their disposable income, whether from gaming to other forms of entertainment, or from one form of gaming to another, such as slots to lottery.

The casino industry is very aware of this shift in entertainment dollars, and has moved well beyond gaming, to make sure customers continue to frequent their properties and spend their dollars.

A couple examples of this:

  1. Foxwoods recently opened a new shopping plaza within its walls, something we see at Aria, Planet Hollywood, Caesars and other Las Vegas Strip casinos.
  2. High-end restaurants, night clubs and theaters are staples in casinos in 2016.

Measuring the success of a casino in 2016 by its gaming revenue alone is an incomplete assessment.

What is the benchmark?

If we try to measure an industry by its best year, we’re going to be constantly disappointed. The mid 2000’s were a period of economic prosperity, and as the study itself notes, gaming revenue first started declining following the 2008 recession. Increased competition likely plays an important role, but this is only one piece of the puzzle.

There is also this belief that an industry’s high-water mark should somehow be sustainable or that the industry can do better. With few exceptions, industries can’t grow forever. Yes, Atlantic City casinos are “struggling,” but all eight of the city’s casinos posted an operating profit in 2015, and they still drive the local economy with tax revenue and jobs.

If your restaurant posted $100,000 months in the past it’s not a failure because it now “only” makes $30,000 a month. It’s still making money and employing people.

Upshot: Failure to replicate past successes doesn’t mean current, lesser successes are failures.

Two reasons Pennsylvania will be just fine

Theere are other reasons to doubt PA will be subject to the pressures the study highlights.

Pennsylvania got it right from the start

Imposing strict guidelines on the number of casinos in any given locale — and imposing restrictions on the type of license a venue is eligible for — allowed Pennsylvania to nip any saturation concerns in the bud.

It doesn’t prevent cross-border saturation, but it does prevent in-state overcrowding, and potential cross-border cannibalization can be mitigated by proper planning.

This in-state “zoning” model is now being used in Massachusetts to avoid saturating the market, and the Massachusetts Gaming Commission recently denied handing out a third license after the Mashpee Wampanoag Tribe began construction on a casino in the same general area.

Instead of handing out the license just to hand it out, the MGC made a prudent decision, and will sit on the third license.

Pennsylvania lawmakers are preemptively working on solutions

The Pennsylvania legislature is working on gambling actively, whether it’s PA online casinos; bolstering existing casinos ability to offer slots at satellite locations; off-track-betting parlors; or offering slots behind secured areas at airports.

This wasn’t a fire-and-forget project; Pennsylvania is dead set on keeping its gaming industry healthy, competitive and innovative.

In an interview last year, House Gaming Oversight Chairman John Payne explained it thusly: “My mission statement is to keep gaming in general healthy, but in particular to make sure our casinos stay healthy and competitive against our surrounding states.”

Pennsylvania lawmakers appear to be taking preemptive steps to ensure this occurs, whereas in other states it feels more like they wait for a problem and then try to fix it.

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