A roller coaster ride?
How often in the last few years have we heard of a gaming company blaming lower than
expected table game hold for its poor quarter or half year result?
The MGM, Mirage, Hilton and most recently Harrah's (or The Rio more particularly) have
all fallen foul of low hold percentages. Poor win rates brought about by dealing high limit
Baccarat to a select few (predominantly Asian) customers.
Win rate volatility is however only one aspect of volatility that operates in this area to make
the business of dealing with high rollers an even riskier proposition.
Volume: Not just of customers but also of total amount wagered. One player I know of turned
over $850 million in wagers in one visit to a particular casino. Another turned over in excess
of $1.25 billion in the course of a year. Add these players in or out of the equation and
volumes can vary dramatically from year to year even though total player visits might remain
relatively constant. Analysts and many casino executives often neglect this factor when
reviewing results or drawing up next year's budget.
Win Rate: Baccarat is a game of chance and so fortunes can, and do, pass both ways across
the gaming tables. The house advantage on Baccarat averages a very low 1.3% to make this
close to a true even money bet every time the cards are drawn for a new hand (or coup as it is
known). An interesting statistic is that 14,981,640 hands need to be played for there to be a
95% confidence interval of results falling between a win rate of 1.25% and 1.35%. If you
multiply this number by a bet of $100,000 you require $1,498,164,503,243 in turnover for
win rate "certainty." An astounding number in anyone's view!
Bet Limits: Betting limits should be based on the following criteria. Firstly, establish what the
capital reserves of the company are. What are the shareholders' expectations from the
operation? Are they risk-averse and therefore averse to using capital reserves to pay losses or
fixed expenses? What are the longest and shortest periods that you must analyze? Can the
shareholders look to one month but no longer than one year, or can you fix longer term
strategies with comfort? What turnover volumes are experienced or forecast? What does the
market expect in maximum betting limits and what effect will not meeting these have on
turnover? What profiles of games are on offer, or are expected to be on offer? What are the
fixed and variable expenses associated with the operation?
Often, however, these questions go unasked and one casino merely follows another in setting
their maximum betting limits. So we end up with maximum bets across the board of
$150,000 (or higher) and policies like setting a maximum bet for an individual player based
as a percentage of their front money, which makes no sense at all. Critically, though, it also
means that each casino foregoes asking the critical questions above. Not all companies are
equal! A publicly listed company should view this business quite differently to one that is
privately held. A view that I'm sure Steve Wynn would now agree with.
Incentives: Dealing with high net worth individuals means that you are often negotiating with
very influential businessmen or entrepreneurs. They want the best of everything from six-star
amenities (like the Hilton's Sky Villas mentioned in the December edition of CE) to the very
highest discounts and commissions. Lose $3 million as a player and write out a check for
$2.1 million! While that doesn't sound too bad a deal, on first view, it does not account for
those that walk away winners. On average, incentives total somewhere between 50% and
70% of theoretical win. Where casinos get their numbers wrong (which fortunately less do
these days due to education programs such as UNR's annual Executive Development
Program and information sources like http://urbino.net) you can even find scenarios where
the company was only ever going to make money when they "got lucky." That is when win
rates were well above the statistical average of 1.3%.
Credit risk: A saying you might hear from executives who deal regularly in this area is "that
you have to win the money twice." Essentially, while you win over the tables you also have
to have a win by getting paid. Payment plans are common as the players do not want to
liquidate assets in the short-term, and some hope to get lucky at another casino in the interim
to help pay off a debt. Negotiations are sensitive and further incentives are sometimes used to
finalize the payment.
So, is high end Baccarat too volatile? It certainly can be if the company doesn't recognize the
full range of risks and manage accordingly. Industry consolidation should help the likes of
MGM/Mirage and Park Place in the Vegas market who now generate most of the industry
volume in the region. Strong balance sheets are also required as high debt levels and a high
risk business are not well suited partners. The Aladdin and its London Clubs operation or The
Venetian should be very mindful of becoming overly enamored with high end Baccarat. As
for The Rio, that will depend very much on whether or not under new management and with
new programs they can generate sustainable turnover volumes. This can be the sexy, sharp
end of the business but at the end of the day it is low margin and high risk. Lots of risk!