Right and Wrong Sizing in Pennsylvania

Casinos in Ohio and other surrounding states are taking revenue from casinos in Pennsylvania and that is forcing those casinos to rethink their business model. In the changing landscape of casino gaming, nothing should come as a surprise. Most casinos in the country are trying to be creative in coping with declines in revenue. Under the pressure of competition and declining revenues, individual casinos are diligently working to reengineer their business models for profitability. The first order of business is always reducing expenses and financial exposure. Like small homeowners, whenever possible, casinos are refinancing their debt and reducing monthly payments.

One category of expense that is being reduced might surprise some observers. Casinos are taking slot machines and table games off the floor. They do that for two reasons. First, it reduces payroll and second it reduces taxes. Each game comes with its own separate license fee, so eliminating 150 slot machines might reduce expenses by as much as $500,000 a year. If the casino removes the least popular games, the play is often transferred to other games thereby improving the efficiency of the remaining games.

Presque Isle Downs in Pennsylvania is one of the smallest casinos in the state and it has been hit the hardest by the competition from Ohio. Its problems were compounded by the weather in February. Each month, the reality of the impact of competition sinks deeper and deeper into the corporate culture. The casino is now trying to right size. Right sizing is a simple way to describe bringing expenses in line with revenues.

Presque Isle Downs & Casino wants to reduce the number of slot machines and table games as part of its plan to make $5 million in improvements and to “right size itself.”…The casino will ask the board to reduce the number of slot machines by 140 — from 1,720 to 1,580…And it will ask to reduce the number of table games from 46 to 42, the petition states… The petition states that slot-machine revenue (10 percent) and table games revenue (17 percent) declined after the opening of four casinos in Ohio, all of which are about 100 miles or less from Erie. John Guerriero, Erie Times-News, 3-30-15

Penn National is also making its adjustments to the competition from Ohio. Penn had hoped to get the last racino license in the state for the Mahoning Valley Race Course. But after lengthy delays and some serious rethinking, Penn has decided to withdraw its request for a license.

Penn National Gaming, Inc. has officially pulled out of a proposed racino just 20 minutes east of Hollywood Gaming at Mahoning Valley Race Course. In a press release Monday, B.J. Fair, chief development officer for the company, said, “We are disappointed to be withdrawing from [Lawrence Downs Casino and Racing Resort]. However, given the continued softness in the economy and the level of market saturation – not just in Western Pennsylvania, but across the Commonwealth – we are regrettably unable to justify this investment in the statutorily required spending levels.” Youngstown Vindicator, 3-30-15

It has become clear to Penn that there is too much competition in the region. However, not everyone has as clear a vision. A state representative has introduced a bill to put more slot machines in the state. Wow! That is just what casinos in Pennsylvania need – more slot machines to dilute their revenue even further.

Imagine stepping into a corner bar and ordering nachos, a Bud Lite and a poker game. Pennsylvania state House representatives introduced a new bill, HB 808, last week that allows video gaming in restaurants, taverns, bars, hotels and clubs with valid liquor licenses. The games include video poker, bingo, keno and possibly others in the future… A manufacturer or distributor would have to pay a $10,000 one time, upfront fee. The establishments — restaurants, taverns and so on — would pay a $5,000 up front fee to the state and annual fees of $1,000 plus $500 per terminal. Terminal operators that own, service and maintain video gaming terminals will pay a onetime, upfront fee of $25,000 for 50 or fewer terminals and $500 for each additional terminal. The allowable number of video game terminals would depend on the size of the establishment. A place with less than 2,500 square feet would be allowed up to five terminals. An additional terminal is allowed for every 500 square feet, up to maximum of 10 terminals. Howard Frank, Pocono Record, 3-30-15

Placing slot machines in bars and other small businesses is unfair competition. A business owner can just add slots to his existing business. The business would pay some one-time fees and a modest annual license fee for each game. The bill proposes less tax on those slot machines than casinos pay on their slots. And, for those small businesses there is no significant capital investment required. Illinois can serve as a model to predict what the impact of slot machines in small businesses will be on the state’s casinos.

Illinois passed similar legislation in 2012. It now has over 20,000 slot machines in bars and social clubs; the machines generated nearly $700 million in revenue in 2014. Not all of that money would have gone to casinos in Illinois, but some would have been spent at the local casinos. The state’s casinos have seen revenues and profits decline monthly as the number of slots in the state grows. New legislation in Illinois would increase the number of slot machines to 10 that are allowed in restaurants, taverns, bars, hotels and clubs with valid liquor licenses.

The lesson from Illinois is clear – allowing slot machines outside of casinos will severely damage the casino industry in Pennsylvania. The casinos are already reeling from the increased external competition and thus the efforts at rightsizing. The proposed slot legislation is wrong sizing. The state legislature could think about right sizing instead of wrong sizing by expanding the state’s gaming options. The time of unlimited expansion has passed in Pennsylvania, just as it has passed in other jurisdictions.


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