Tribal casinos: Profitability, floor optimization and the long-term impact of prediction markets

Thanks for joining us, Grant. To start with, I found it quite interesting in your report that the margins are higher for Tribal casinos than their commercial counterparts in Nevada. What is it that Tribal casinos have going in their favor in that regard?

For the most part, I think what you’ve seen, especially in some of those urban casinos, is that you’ve got a lot of slot play that’s really driving that revenue.

Slot play is a high-margin business, with a lot of coin-in and a lot of payout from that percentage. So I think that, with the majority of Tribal gaming revenue still coming from slots, that’s going to create those higher margins. 

Obviously, your compact fees compared to Nevada on the tax side are going to have an impact based upon what state you’re in. But I think those things are definitely continuing to show growth from an operating margin perspective.

And does your report go into detail on the difference between Class II and Class III margins?

No, we don’t go into that because, to get 118 casinos’ charts of accounts on an apples-to-apples basis, not all of them had that broken out. They might have it broken out internally on their economy system or ICT system. 

But you’re right. It’s not in the report, but I can tell you that, from being at a lot of different casinos on an annual basis, many of them are re-evaluating their floor-mix strategy. You’re seeing them take a strategic view of that floor allocation and ask: where can you maximize those returns? Because depending on what your state compact is, a lot of those Class II technologies have really improved over the years. 

Now, you get down to Oklahoma, and you still have 40% of your floor that’s Class II, and that’s going to be 60-70% of your revenue, just because Oklahoma customers are very familiar with Class II and they love Class II, right? You get to California, and when Class II first went in there, it definitely wasn’t the case. But you’re seeing that technology evolve from an operator perspective. So, if you can cut out some of those costs from a compact perspective, you’re seeing people look at that from a floor-optimization perspective. 

That's really interesting – the regional differences and breakdowns really come to the fore there. Even between Oklahoma and California, there are very different player preferences... 

A lot of it, you still look at Baby Boomers, I can’t remember what the exact statistic is, but I think there are 10,000 retiring a day still, and they still control two-thirds of the wealth in the US. And they’ve been playing Class II for years down in Oklahoma, and they’re going to continue to play Class II. So it varies by demographic, as you noted. 

Your report outlined several reasons why profit margins are declining, even as revenue rises. Could you single out the main reasons?

Location matters more than ever. The urban casinos – their profit margins were right up there at around 40%, whereas rural casinos were at 23%. Mean expenses slightly rose. But if you look at it from where casinos are at, it depends on where they are in terms of location and what type of revenue they are generating. 

But I was surprised to see that large an increase among the casinos that participated in both years, at 16%. With the operating expenses, I went right to labor because I’m thinking it must have been there, right? But labor actually slightly decreased. So, really, it was the inflation on some of those supplies. The one thing I definitely saw after digging in and doing a fair amount of research was that depreciation expense was higher. That’s a non-cash expense, but I think what we saw is that a lot of casinos continue to reinvest in their facilities.

And so, with that, you’re going to see a higher depreciation expense. Whether they’re depreciating it over 20-30 years, based upon what their internal accounting policies are, you’re seeing that reinvestment within those facilities, which is a good thing. 

Moving forward, how much of what’s in the report and what we’ve talked about here is cyclical, in the sense that it’s an external pressure you can’t avoid? How much of it is, as you mentioned earlier, floor optimization for Tribes and casinos? 

I’ll try not to be too long-winded here. But I think there are three things you really have to look at. Obviously, expense management will be important moving forward. You’re going to want to look at labor efficiency, procurement, capital planning and, obviously, marketing. So operating in a smart, strategic fashion will be important from the expense side. 

The other thing is technology – and not specifically just AI. I think moving to the cloud – we’ve moved over 100 Tribal casinos to the cloud from a financial ERP system. So you see that ROI come through with some of that automation, and then AI will be a competitive advantage. The casinos that know their guests will still be the winners. AI isn’t going to replace hospitality, but it’s going to help operators better understand their customers and deploy marketing dollars more efficiently and effectively. 

Lastly, you can’t have a conversation without talking about prediction markets, right? They’re the biggest wildcard out there. We’re seeing those platforms increasingly offering products that look, feel and smell like wagering, but they’re outside the traditional gaming regulation and compact structures. There’s no doubt that prediction markets are the biggest threat out there to Tribal sovereignty and commercial gaming. I think that’s why you’ve seen IGA and the AGA work together to try to minimize that impact. 

It sounds like any major marketing campaigns or strategies might, at the very least, undergo extra review in the coming months...

This time next year, if Tribal GGR sets another annual record, could we face a situation where someone says, 'actually, the threat of prediction markets was overblown because people are still coming to casinos?'  

That’s interesting. And I think you could say the same about sports betting or online gaming. You’ve seen some Tribes enter into compacts with states and now offer those, which isn’t specifically within this report. You go up to Michigan, and they’ve been pretty successful with the Tribes on online gaming, and go to New York on sports betting. 

But with prediction markets, you have to look at the long-term plan. Your typical player tends to be younger males, and nine out of 10 players, according to the Wall Street Journal, say they’re losing money on it. 

Casinos are working hard to get that next generation in the door, and you may not see the impact next year or the year after. But at some point, there will be a wealth transfer within the US and it’s going to happen over many, many years. If that next customer is more accustomed to gaming through prediction markets or online, where the Tribes don’t have that, it definitely impacts Tribal sovereignty and gaming in the next generation. So I don’t think we can analyze it on a year-by-year basis, but over the long term, I think it’s a huge threat. 

I think that’s a fair comeback, really. I was at the IGA trade show last year and prediction markets had overtaken sweepstakes as Tribal gaming's biggest perceived threat. This year, the conversations were the same. But in that time, the volumes have increased exponentially, so what exactly can Tribes do? 

I don’t think anyone can answer that in one sentence. But I think what you’ve seen is that, over a long period of time, Tribes have built good relationships with their senators and members of Congress at the federal and state levels. And I think utilizing those relationships – you know, the Indian Gaming Association’s office is steps from Capitol Hill, steps from the Senate and Congress up there – from a regulatory and political perspective is going to be huge and is the right step. 

Talking to their legal counsels and partnering with commercial gaming to continue the fight against prediction markets, I think it’s going to be the continued strategy you see. And then monitoring and evaluating it from a state-by-state basis, where you’ve seen Nevada and other states directly file lawsuits against the prediction market operators, is another angle on something that’s got to be monitored. But I don’t think, as you said, there’s one silver bullet. 

Your point on Tribal and commercial collaboration is an interesting one because, maybe two or three years ago, commercial and Tribal operators were a little more adversarial. And it could be that the two will now join together more in the longer term against a common enemy of prediction markets...

You’ve seen more Tribes join the AGA, but more importantly, the Indian Gaming Association is going to be the largest lobbyist group for Tribes. And you’ve seen IGA and AGA get together to fight prediction markets, so I agree with you.

As Tribes continue that growth, to be successful, they’re going to have to continue combining data analytics, discipline, expense management, strategic reinvestment and the exceptional guest experience. 

Despite continued technology and AI, at the end of the day, we’re still in the hospitality business. And that definitely matters to the customer. So that person-to-person touch and warmth when you walk into a Tribal facility will continue to be important, but monitoring the regulatory side will be too.