Place your bets
With legalized gambling headed for Kansas, it’s a roll of the dice who will be bankrolled or busted.
By RICK ALM
The Kansas City Star
For 13 years the metro area’s Missouri-based casino monopoly has grown and prospered.
Those days are numbered.
Legislation signed April 11 by Kansas Gov. Kathleen Sebelius authorized four state-owned casino resorts, including one in Wyandotte County, plus slots at three pari-mutuel racetracks, including The Woodlands in Kansas City, Kan., just a short hop north of Kansas Speedway on Interstate 435.
One-armed bandits at some Kansas tracks could be in business by early next year, with all facilities expected to be built and open before 2010.
Las Vegas lost its U.S. casino monopoly in the late 1970s when Atlantic City legalized gambling. Atlantic City’s eastern seaboard monopoly has since been eroded by competitors.
Now it’s Kansas City’s turn.
“The same thing is going to happen in Kansas City” when casinos open across the state line in Kansas, predicts Smedes Rose, a gaming industry analyst with Calyon Securities. “It’s definitely going to hurt.”
The only questions appear to be how much and who will be left standing when the dust clears. After all, there’s only so much money to go around.
The last time the Kansas City gaming market had five casinos, one of them, Sam’s Town, went belly up.
Now this marketplace is rushing headlong toward six casinos — and maybe seven or eight if the courts allow a tribal casino in downtown Kansas City, Kan., or if the Missouri Gaming Commission gives an unexpected nod to new casinos proposed for Parkville and Sugar Creek.
Meanwhile, other pressure is building on local casinos’ bottom line, including the increasing likelihood of a state or local smoking ban. Such bans in other jurisdictions reportedly have slashed casino revenues by double-digit percentage points as smokers opted out.
More bad news for Missouri’s casino industry unfolded in the waning days of the 2007 Missouri General Assembly when lawmakers refused again to repeal the state’s $500 loss limit. Repeal of the rule, unique in the world, would have allowed Show-Me State casinos to market themselves to the nation’s high rollers.
The new Kansas casinos will not have loss limits and could immediately become the venues of choice for local high-stakes players as well.
A filibuster that was shut off by an 11th-hour tax deal with anti-gambling lawmakers killed loss-limit repeal in Missouri, perhaps for years to come.
But even before the final gavel fell, gaming industry executives began talking openly of mounting a citizen petition effort to force a statewide repeal referendum in 2008.
For now, Missouri casino operators appear shell-shocked, bracing for a cash hemorrhage from their bottom lines.
Shell-shocked
David Katz, an analyst at CIBC World Markets, estimates the Kansas bite at 10 percent. “That’s probably the low end of the range,” he added.
The high end might be a report from the Kansas Legislature’s research staff that projected the new Wyandotte County casino to rake in $258.6 million a year, plus at least $68 million from 800 or more slots at The Woodlands.
Those are very large numbers and together would represent about 45 percent of the four-casino Kansas City market that last year grossed $714 million. About 84 percent of those revenues were earned by 8,200 slot machines. Details are not known yet, but the two new Kansas gambling parlors are expected to add at least 3,000 slots to the market mix.
Troy Stremming, a vice president at Ameristar Kansas City Casino and Hotel and lobbyist for the Missouri Gaming Association, terms the Kansas revenue projections “extremely aggressive.” But he does not rule it out — especially if Missouri loss limits are not repealed.
Ameristar, the market’s largest gambling operation, with 3,000 slots, grossed $259 million last year.
Revenues are hard to predict today, Stremming said, because “we don’t know what they’re going to build over there.”
Kansas revenue projections might be plausible if a no-limit casino resort with 2,500 or more slots, table games and other visitor amenities is located, as widely expected, near the popular Village West retail and entertainment district. That sprawling complex in western Wyandotte County is the state’s No. 1 tourism attraction.
Whatever is built there will not be shabby. State law requires casino operators to invest a minimum $225 million in bricks and mortar to guarantee first-class “destination” venues.
But “$225 million doesn’t buy you a lot these days,” Stremming said. He noted that Ameristar is completing a $240 million expansion in St. Charles, Mo., that added only a 400-room hotel and a parking garage to its casino there. Ameristar Kansas City was built a decade ago for about $300 million.
“If you build the equivalent of Ameristar, I think they’re going to grow the market,” said Stremming, just as every previous market expansion here has grown it.
A quality casino in Wyandotte County, he said, would be a convenient option for Johnson County residents and others mostly to the south and west that might not have made the drive to Missouri’s casinos.
Woodlands officials recently disclosed their “racino” expansion plan that will leave the dual dog-and-horse track with just one clubhouse.
A new structure to house slots would adjoin that building. The current dog track and clubhouse would be redeveloped or razed.
Against so much glitzy competition, however, the market appeal of between 800 and 1,000 racino slots at The Woodlands is arguable. Track operators also must cope with a tax disparity issue.
The new Kansas casinos will pay an estimated 27 percent of gross revenue in state taxes. That’s comparable to Missouri, where gambling taxes average 27.8 percent.
Track slots, however, will be taxed at an effective rate of 60 percent, leaving little to pay the bills and compete with national companies such as Ameristar and Harrah’s.
Analyst Katz has seen such unbalanced market dynamics before. But he is quick to caution that player preferences shake out over time and for a number of reasons, including where they feel rewarded and where they feel most comfortable and “lucky.”
That raises another issue for players. Missouri casinos are required to publicly report their monthly slot machine payout rates and aggressively advertise the market’s “loosest,” or best-paying, slots. The new law in Kansas closes those financial records. That lack of public disclosure may push away the market’s savviest slot players, who seek out every edge against the house.
Margins matter
The coming competition for gamblers’ hearts and pocketbooks could have some benefits.
“The existing properties are experienced operators,” Katz said. “They have momentum and they know what they’re doing.”
The Kansas casinos “will cost them some margin,” he said of the Missouri boats, “but they’ll promote a little more heavily” with richer comps and giveaways to woo players.
But if Kansas’ bite from the bottom line grows too large, the local casino environment could quickly sour for players.
“We’ve seen it in Illinois,” said Katz, where it was not new competition but huge graduated state tax hikes of up to 70 percent of gross that effectively erased casino margins.
Lawmakers have since rolled back their 2003 tax hike in phases that finally end July 1.
But the industry has not fully recovered, said Tom Swoik, executive director of the Illinois Casino Gaming Association. As margins dried up, Swoik said, the casinos cut back dramatically on marketing, comps and freebies for players. More than $250 million in capital expansion projects were postponed or canceled.
“Some casinos started charging admission fees again,” he said. “Some charged for parking, or charged more for drinks.”
The slots also tightened up a bit, while more than 2,000 employees — of 11,000 at the time — were laid off. Not all of them are back yet, he said.
Neither are all the players who fled Illinois’ suddenly stingy riverboats for casinos in neighboring states such as Missouri, Iowa and Indiana.
“We lost market share,” Swoik said. Worse, he added, the industry lost growth momentum that only now is beginning to recover.
Similar stories abound in other markets where competition or sharply rising taxes have left casino executives struggling to keep players and stockholders happy.
When lawmakers in Maine earlier this month proposed a tax increase on a Bangor casino still being built under a previous tax deal with the state, the casino company shut down its $131 million job site. Lawmakers backed off and work resumed. But Maine, like Illinois, is now high on the industry’s watch list as a politically unstable place to do business.
In New Jersey, Atlantic City slot revenues fell 12 percent last month, and analysts largely blamed the falloff on newly opened slot parlors in Pennsylvania and New York.
At the same time, Pennsylvania’s slots-only gambling houses are nervous over talk of neighboring West Virginia adding table games to its slots-only racinos. Detroit’s three urban casinos are wary of a tribal casino proposal 25 miles outside of town.
Indiana’s modest riverboat gambling market is under competitive assault like almost no other. New or expanded competition is under construction or being debated in bordering states Illinois, Michigan and Kentucky. Indiana lawmakers a few weeks ago approved legislation that will allow slots at Indiana racetracks.
Swoik said the industry in every state must deal with state lawmakers “who think we print money. … Those guys think we’re making billions.”
A few years ago, two economists from St. Louis University were granted access to confidential Missouri casino data and found that four of the state’s 11 casinos had lost a combined $44 million the previous year. The state’s seven other casinos posted profits that averaged about 5 percent. Missouri Gaming Commission officials who see the same data agreed at the time, saying that 6 percent profit margins were typical.
This year, Missouri casino operators were willing to trade repeal of the $500 loss limit for a 1 percent or 2 percent tax increase.
When filibustering lawmakers forced a 4.25 percent tax bump, casinos walked away from the deal.
“It’s a tax increase we can’t afford,” said Ameristar’s Stremming.
But Missouri’s casinos can’t walk away from Kansas.
The riverboat market
Nobody knows how big a bite Kansas casinos will take from Kansas City’s riverboat market. The best guesses among experts today range from 10 percent to 45 percent.
There’s little doubt, however, that the bite will hurt Kansas City’s four-riverboat gambling marketplace, which has posted 12 consecutive years of revenue growth.
Kansas City casinos’ pretax gross revenues last year were up 3.7 percent from 2005, to $714.5 million. That followed 1.7 percent growth in 2005.
Only Isle of Capri, the market’s smallest casino, is falling behind the pace and last year posted its second consecutive year of revenue decline. |
