Casino gaming grows, but regional revenues lag
The United States commercial casino industry generated $37.8 billion in 2013, expanding by 1.3 percent. The growth in gaming revenue was the result of gaming expansion in new markets, but was tempered by existing markets experiencing declining revenue and market cannibalization.
In 2013, there were 23 states with commercial gaming operations. Of these states, six expanded gaming in 2013. Gaming expansion is defined as the opening of new casinos or expanding casino game offerings, such as table games.
Ohio had the largest increase in gaming revenues (149.1 percent), as the market benefitted from the existing casinos operating for a full twelve-month period (Ohio’s first casino opened in May 2012) and the opening of three new “slot-only” racinos and one new full-service casino in 2013. Maryland was second to Ohio, with a 98.2 percent increase in gaming revenues. Maryland’s growth is contributed to the state legalizing table games—boosting existing casino revenue more than 46.5 percent, the benefit of a twelve-month period for its largest casino, Maryland Live, and the opening of Rocky Gap Casino, a small resort casino in the western part of the state. Collectively, Ohio and Maryland generated $1 billion more in gaming revenues during 2013.
With gaming expansion leading to exponential revenue growth in states like Ohio and Maryland, state legislatures often view gaming expansion as a magic formula for increasing tax revenues. However, this formula is no longer holding true as markets are reaching the point of saturation and states are increasingly cannibalizing gaming revenues from neighboring gaming jurisdictions.
Reaching the point of market saturation was most notable in Pennsylvania. In June 2013, Pennsylvania opened its twelfth casino (a small resort casino); however, the overall market experienced its first year-over-year decline (-1.5 percent) in gaming revenue since the first casino opened in November 2006.
States cannibalizing neighboring jurisdictions gaming revenues is most evident in the Kansas City market. In 2011, the Kansas City gaming industry generated $741.5 million in revenue and encompassed five Missouri casinos. In 2012, when Kansas legalized gaming, a sixth casino—Hollywood Casino at Kansas Speedway—entered the market. The addition of a sixth casino has resulted in the market’s overall gaming revenue increasing by $37 million, as the market generated $778.5 million in 2013. However, the expansion of gaming in Kansas has come at a cost to the original five Missouri casinos. In 2013, the new Kansas casino generated $131.2 million in revenue. Assuming the five Missouri-based casinos would have experienced flat revenue growth during 2012 and 2013, the new Kansas casino effectively generated 71.8 percent of its revenue through the cannibalization of Missouri gaming revenues.
Overall, the United States commercial gaming industry will continue to grow through the emergence of new markets such as Massachusetts and New York; however, the growth will be mitigated through continued declines in existing markets. With regional casinos facing declining revenues, there are three significant trends to observe going forward in 2014: continued market expansion, partnerships between states, and diversification beyond the gaming floor.
Market expansion will be a key area to observe throughout 2014 as state legislatures still view gaming as an industry that can aid in overcoming budgetary gaps. Most notably, the legislative decisions in Illinois and Pennsylvania will be critical for existing operators. Each state is already facing market saturation, but both legislatures continue to contemplate expansion through new casinos or video lottery terminals in local bars. Meanwhile, Massachusetts and New York will continue to garner attention as the reality of gaming expansion comes closer throughout the respective casino selection processes.
Partnerships between states will become more and more prominent, as states work to lobby for the overall growth of the gaming industry. The first example of such partnerships will likely emerge between South Dakota and New Jersey, as the two states are working to link wide-area progressives. The agreement will increase the jackpot dollar amounts, leading to an increase in wagering. The continued legalization of online (interactive) gaming on a state-by-state basis will lead to inter-state compacts. Delaware and Nevada will likely lead the industry, as these states have already agreed to a compact in principal and will continue to work out the technical details in 2014.
Diversification beyond the gaming floor will remain critical for regional markets, as the traditional brick-and-mortar industry continues to face an aging demographic. Regional operators will need to learn from the story of the Las Vegas Strip. In 2013, the Las Vegas Strip achieved near-record visitation volume (down 0.1 percent from the record set in 2012), but continued to remain well below pre-recession gaming revenue records ($6.5 billion in 2013 compared to $6.8 billion record set in 2007). The ability for Las Vegas to achieve record visitation volume is attributed to its ability to transform from a gambling town to an entertainment and vacation destination for all generations. As the casino floor target market continues to age, regional operators must identify ways to make their facilities local entertainment destinations that attract the millennial generation.