Raising the Stakes
Detroit’s gaming market — the fifth largest in the United States — is facing increased competition as eight more casinos are proposed in Michigan, with another four under development in Ohio.
The once-bustling Pontchartrain Hotel offers an ideal setting for a fourth casino in the heart of downtown Detroit. The former 367-room complex, constructed in 1965 on the original site of Fort Pontchartrain, the city’s first permanent European settlement, offers plenty of attributes: freeway access, available parking, adjacency to a major conference center (Cobo Center is undergoing a nearly $300-million renovation and expansion), growth opportunities, and nearby entertainment.
But whether the casino — along with eight other gaming ventures proposed in the state — opens its doors is an open-ended question.
The Snyder administration, along with the Legislature, doesn’t support added gaming. It may not matter. Even without Lansing’s blessing, casinos can be added if voters approve a statewide ballot initiative or the U.S. Department of the Interior recognizes tribal land suitable for gaming.
However, getting voters to approve additional gaming sites could be a tough row to hoe, given the existing casinos would likely undertake a full-court press to prevent any expansion of the market. Gov. Rick Snyder and legislative leaders may join the fray, as well.
Casino backers, on the other hand — which mostly consists of local investors — would argue that a large portion of the taxes raised from the prospective gaming halls will remain in the state and support their respective communities.
Eight of the proposed casinos — locations include Detroit, Romulus, Mount Clemens, Grand Rapids, Pontiac, Cadillac, Birch Run, and Lansing — would be non-Native and privately owned. The remaining proposal comes from the Sault Ste. Marie Tribe of Chippewa Indians, which seeks to build the so-called Kewadin Lansing Casino for $245 million in downtown Lansing.
To encourage voters and others to approve gaming expansions, backers are offering enticements including promises to support four-year college scholarships and other school programs, as well as providing funding for local and state units of government, and backing the Pure Michigan advertising and marketing campaign. In addition to a four-year scholarship program for high school graduates residing in the Lansing School District, the proposed Sault tribe casino would fund member health care, housing, elder care, and social services.
Jake Miklojcik, president of Lansing-based Michigan Consultants, which produces economic forecasts and feasibility studies for gaming and other industries, says there’s not much room for gaming expansion in Michigan. “There’s roughly 20 percent more growth that could be had in gaming, which represents close to $500,000 in (annual) revenue,” Miklojcik says. “Once you reach that point, the casinos would begin to look around for added revenue, and there’s only so far you can go before it becomes too expensive for travelers to come here.”
He adds that if a ballot initiative reaches voters, the cities that stand to gain a casino will be very aggressive in their attempts to lure constituents. “If I’m the mayor of Cadillac, do I care that Mount Pleasant has the Soaring Eagle Casino and Resort? Not really. I would be looking to increase my tax base and offer more services to citizens,” he says. “But if you fracture the supply of casinos and add several more, the demand won’t automatically appear.”
Behind the Scenes
Since 1999, MGM Grand Detroit, MotorCity Casino, and Greektown Casino have provided millions of visitors with recreation, entertainment, conferences, and events. Last year, combined revenue from the three casinos topped $1.4 billion — a 3.4 percent increase over 2010. Like most other businesses, casinos and gaming are subject to criticism. While some believe casinos take advantage of unsuspecting patrons, the proportion of problem gamblers typically falls somewhere around 0.5 to 3.0 percent of total players. And for those individuals, casinos and allied support groups provide intervention and rehabilitation programs, often at the scene.When a player runs into gambling difficulty, the casinos seek to prevent what’s known as overextension, says Gregg Solomon, president and CEO of MotorCity Casino. “Overextension is when it’s no longer a game,” he explains.
When a problem arises, a casino typically asks an individual to take a room on the house in order to sleep and/or calm down. Casinos also provide phone numbers gamers can call if they get into trouble, and offer programs to ward off compulsive gaming. Most casinos supported rules that made it harder to access cash — ATMs are located at least 50 feet from gaming devices, and none are provided on the casino floor. What’s more, credit cards can’t be used at slot machines.
Another area of potential disapproval is misinformation, often among politicians However, in recent years, Solomon says the industry has worked to develop a constructive relationship with city hall. Still, he wishes there were fewer myths about casinos in the mind of the public. Among them: “Casinos hold patrons’ homes as collateral,” or “Casinos have ‘bought’ politicians,” Solomon says. Other stereotypical images include “Casinos with vaults full of money” and “Suitcases stuffed with cash.”
As it stands, state law stipulates that casinos, including employees and suppliers, cannot donate to political campaigns in Michigan — in fact, it’s the only industry in which political influence is a felony.
Casinos have generated jobs, income, tax revenue, infrastructure, and education within the city limits. Detroit’s casinos — which combine a variety of gaming offerings (slots, roulette, craps, and blackjack) with hotel guest rooms, elaborate food and beverage stations, bars, shops and boutiques, live entertainment, and free or low-cost transportation to facilitate tourism among their clients — have managed to survive, and even expand, in an increasingly competitive environment.
The tax burden is but another hurdle facing Detroit’s gaming establishments. State and local taxes on the casinos in Detroit are set higher than they are in better-known destinations such as Las Vegas. For Detroit’s gaming facilities, there is a 19 percent tax on gross gaming revenue — 10.9 percent goes to the city of Detroit; 8.1 percent goes to the state of Michigan. In addition, Detroit and Lansing levy annual municipal service fees, raising the effective total tax burden considerably above 20 percent. This figure excludes federal taxation.
To date, Michigan hasn’t sanctioned other gaming endeavors, such as horse racing, card rooms, and electronic gaming devices, as several other states have done. In one sense, the absence of other gaming establishments concentrates gaming dollars at Detroit’s large and conveniently located casinos. What’s more, with Caesars Windsor (formerly Casino Windsor) right across the river — it opened in 1994 — there’s been virtually no let-up in the competition for gaming dollars.
With the possible entry of nine casinos in Michigan, existing gaming operations have their hands full trying to predict the future. Complicating things are four casinos under development in Ohio — Quicken Loans Chairman Dan Gilbert and Caesars Entertainment Corp. are opening gaming venues in Cleveland and Cincinnati, while Penn National Gaming Inc. is opening facilities in Toledo and Columbus.
When the four casinos in Ohio are fully operational, Miklojcik projects the overall casino market in Michigan will see a combined revenue drop of between 2.5 percent and 5 percent. To offset the loss, state-based casinos will look to expand their marketing efforts to more distant locations. “If you add more packages tied to gaming and sports, or gaming and entertainment, you can get more weekend travelers,” Miklojcik says. “But there’s only so far people will be willing to go.”
Yes, Gaming is an Export
Regardless of size or location, casino gaming, in the economic scheme of things, is very much an export industry. Many cities seek out and often support firms and industries that export goods and services. That’s because regions that generate exports correspondingly draw investment and people, including (it is hoped) young college graduates eager to start families. In turn, new casinos support hundreds of full- time and part-time jobs.
In what way are Detroit’s casinos considered exporters? The answer centers on exactly what it is that casinos export: Entertainment, with its immediate consumption and pleasurable after-effects. Consider that the University of Michigan attracts students and their tuition from towns, states, and nations beyond Ann Arbor; the university staff then endows the students with higher education; finally, that education is “exported” back home or to other locales.
Similarly, the Detroit casinos draw gamers and gaming dollars from the suburbs and other states or nations. According to a 2011 opinion poll conducted by the American Gaming Association, 31 percent of Americans visit casinos over a 12-month period, and 77 percent of visitors say that an evening at the casino is a good value versus other entertainment options.
Some skeptical observers, however, suggest new gaming venues merely cannibalize business from existing entertainment enterprises. The displacement effect might occur in the case of a casino capturing business in an already-thriving tourist-based economy like Florida, but on balance, proponents say the financial impact is a net plus, as empirically demonstrated in cities as disparate as Detroit, Windsor, Las Vegas, and Atlantic City — where, on average, 15 percent of patrons are residents. That means a far greater proportion of people would not have visited a particular city were it not for the local casino.
Given the Detroit casinos attract sufficient outside dollars from the suburbs, Canada, and out-state residents, local movie houses, pubs, restaurants, and motels are not adversely affected; in fact, these types of establishments can benefit from gains in new spending, investment, and population growth in their vicinity.
There are also multiplier effects related to the exportation of casino markets. Simply stated, multiplier means that each additional dollar spent in a casino or invested to build and enhance gaming facilities augments someone’s income, thus setting off another round of spending. When added to the initial amount spent, these subsequent ripples magnify the overall impact of the original dollar.
Most economic studies suggest that multipliers for large cities like Detroit are in the range of 1.35 to 1.75, meaning that each $100 coming into Detroit from beyond the city limits, on average, results in added spending of $135 to $175. The multiplier is larger for regions that are closer to self-sufficiency, meaning incoming dollars from new spending or investment are more likely to circulate in a given city when most services and goods can be obtained locally. Another way of viewing this important facet of tourism is that dollars spent and re-spent locally reduce a resident’s need to purchase goods and services outside the city, resulting in less leakage of dollars to other regions.
Another positive economic facet of casino demand is personal income hikes. For example, if one’s income rises by 1 percent (discounting inflation), studies show that the average gambler’s spending on gaming entertainment will increase by 1.5 percent. Such spending characteristics endow gaming services with what is known as a high-income elasticity of demand. The proliferation of casinos across the U.S. and the world confirms rising income levels, especially in North America, Asia-Pacific, and the near East.
Another measure of success in the gaming industry is a casino’s ability to attract repeat business. Even in a bad economy, organizations producing services like casinos — rather than manufactured goods such as new cars and trucks — represent more stable sources of employment and municipal revenue.
It is true that manufacturing firms pay better wages than casinos, but that’s due to more sophisticated equipment that confers greater productivity and added value per worker. However, as Detroiters now know all too well, the downside to manufacturing — especially when it encompasses older equipment, lackluster productivity, and disinterested workers — is a greater susceptibility to severe swings in demand. Conversely, casinos and service-based economies are less prone to the peaks and valleys of business cycles.
Still, casinos face most of the same threats as any other business. Caesars Windsor, for example, provided Detroit with a preview of the challenges that would lie ahead. According to the Windsor Convention and Visitors Bureau, 3 million tourists entered the city in 1993, the year before Caesars Windsor opened.
By 2002, Caesars Windsor had become the city’s leading trip motivator, with tourist traffic doubling to an estimated 6 million visitors annually. Of that traffic, surveys indicated that 85 percent of the visitors traveled from Michigan and Ohio.
Such is the attractiveness of “all-in-one” service facilities that house gaming, cafes, and entertainment in the center of a bustling downtown. The obverse is also true. It should have surprised no one that a strike at Caesars Windsor caused a tsunami beyond the gaming tables. Losses sustained by the city from a union work stoppage at Caesars Windsor in the spring of 2004 were crippling. The 41-day walkout directly resulted in the layoff of 3,000 employees. Indirectly, many more jobs were lost at nearby hotels, restaurants, and boutiques.
Apart from outside competition, do Detroit’s three casinos present an insurmountable threat to traffic and profit margins? That certainly would be true without the element of creativity, where each adopted active, deliberate strategies to differentiate its identity and service footprint from the other two casinos. Greektown, for instance, created a more ethnic flavor, while MotorCity reached out to an urban clientele. MGM Grand, on the other hand, patterned itself after a Las Vegas resort and subsequently gained the greatest share of total gross revenue.
Intensely competitive marketplaces require firms to use differentiation as a marketing tool. Differentiation is often the key to remaining in the game financially. This is particularly true in Detroit, where income, population, and tax bases were eroding prior to the establishment of commercial casinos or the ascendancy of out-state tribal casinos.
Yet another challenge arose for Detroit’s casinos as they transitioned from semi-permanent to permanent casinos. Legislation that enabled the casinos to open also mandated their expansion to 400 hotel rooms apiece by 2009 (initially each casino had to offer 800 rooms, but the stipulation was pared back following negotiations). Former Gov. Jennifer Granholm threatened to raise taxes on casino gross revenue by one percentage point per year for three consecutive years if the expansion plans failed to materialize by 2009.
Ostensibly, the purpose of this coercion was to accommodate guests whose conventions or vacations required one or more room nights, especially in the case of out-of-towners. Each overnight stay constitutes a potential enhancement of revenue, both to casino workers and to government coffers.
But along with such expansion came a heightened risk of loss, as Greektown soon demonstrated. Investing in new capital amounted to hundreds of millions of dollars. If, for any number of reasons, casinos fall victim to patron traffic falling short of expectations, delayed issuance of construction permits, or legal and labor disputes, they immediately face daunting challenges to profitability from government-mandated timetables for expansion.
In this instance, unfortunately, the completion or expansion of casino hotels coincided with the formidable economic meltdown of 2008-09, along with the national and worldwide financial turmoil. As a result, casino revenue growth suffered, and Greektown filed for asset protection.
Still, combined revenue fared markedly better than most other revenue streams, especially those filling tax coffers for the city of Detroit. Once again, creativity came into play. Part of the casinos’ response to these serious economic and competitive challenges came in the form of targeted marketing. From local area retirement homes to national travel brochures, incentive packages combined entertainment-gaming-food-transportation-hotels and shopping. Family getaways were advertised heavily, as well.
Despite years of economic pressure, the three casinos have survived through innovation and investment. They offered dice games when Ontarian law forbade Caesars Windsor to have “craps.” The Detroit casinos’ labor relations were better, helping them avoid lengthy worker walkouts of the 41-day variety that afflicted their cross-river competitor. And Detroit’s casinos permit smoking (preferred by many casino-goers), whereas smoking is prohibited at Caesars Windsor.
As MotorCity’s Solomon puts it, “Casinos rent space in front of slot machines or card tables. The imperative of a casino is to assure patrons of a comparable two hours of good time that the clientele would have at a movie theater with the pre-purchase of popcorn and a beverage.” It’s also the kind of added service that recharges the rundown batteries of a workforce and can help reignite motivation and growth in a community and state. db