Shortly after I retired as a portfolio manager, I went to work part-time at the Rutgers business school in Newark. No, it wasn’t to teach investing or portfolio management–accreditation rules effectively rule this out for anyone without a PhD in (the alternate reality of) academic finance. Instead, it was in a practical management consulting class run by adjuncts with real-world experience and advising mostly small businesses. (We were all fired several years later and the program–the only profitable area in a school dripping red ink–dissolved. …but that’s another story).
Anyway, one of the projects I mentored involved a casual dining restaurant. A student had a connection with a very successful pizza restaurant whose approach might serve as a model for our client. The pizza owner said he had superior results. How so? …he had cloth tablecloths and fresh flowers on each table; the food was good; he spoke with every customer himself to make sure everyone knew they were welcome. In fact, he drew customers from as far as 15 miles away.
How far was the closest competing pizza restaurant? …30 miles.
Put a different way, in this state customers hungry for pizza went to the closest restaurant, despite what this owner thought was his special charm!
It’s the same with a lot of other things, including local casinos.
In the case of Connecticut, the two existing operators are coming under threat by the decision of Massachusetts to legalize gambling in that state. In particular, it’s allowing MGM to open a casino just on the northern border of Connecticut in Springfield, MA.
Hartford has just responded by authorizing a new casino in East Windsor just on the Connecticut side of the border from Springfield, to be jointly run by the two incumbent operators.
This is an interesting case. Let’s take a (simple) look:
My pizza rule says customers go to the closest casino. If that’s correct, the new Massachusetts casino will reduce the existing Connecticut casinos’ revenue by a substantial amount. Hartford estimates that amount at a quarter of the current business, about $1.6 billion. If they want to keep the remaining 75%, however, it seems unlikely to me that the casino operators will be able to reduce their costs by much. So their profits could easily be cut in half.
And when the proposed East Windsor casino opens?
Figure that East Windsor will take back from Springfield half of the revenue initially lost. That’s $200 million a year. From the state’s point of view, any revenue gain means higher tax collections–in this case, about another $35 million a year. So it’s understandable why East Windsor has gotten a legislative seal of approval. It’s not clear, however, that the casino operators are going to be better off–because they’re taking on the expense of a third location in order to protect 12% of their current revenue.
We’ve also seen this movie before in the northeast US, with the effect on Atlantic City of gambling legalization in Pennsylvania, and on Pennsylvania of legalization in Ohio and Maryland. One additional complication in this instance is that both of the incumbent operators are Native American tribes, for whom maintaining/expanding employment may be more important than profits. A second is that the new CT casino will be run by two in-state rivals. That should be interesting to see.