Racinos: Room for Growth, Need for Diversification

Though the results of the Nov. 5 elections have the potential to be positive for the racing industry in some states, a top casino executive warned against the "irrational exuberance" that could develop at a time when racetrack gaming must become destination gaming.

In Maryland and Pennsylvania, gubernatorial candidates in favor of racetrack gaming were victorious. Should legislation authorizing slot machines or video lottery terminals win approval, the proper plan must be in place for success, said Don Snyder, president of Boyd Gaming.

"The results of the elections made it clear the dialogue will continue," Snyder said Nov. 7, the first day of the Racino 2002 conference at Dover Downs in Delaware. "The question isn't if gaming will expand, but how much and how quickly. (States) will be faced with a balance between opportunity and irrational exuberance."

Snyder spoke in reference to the "gold rush mentality" that could develop as states seek to correct budget shortfalls or aid racetracks that are fighting to survive in the entertainment and gambling marketplaces. He said there must be a strong regulatory system in place, as well as a reasonable tax structure, in order for companies to make the investment.

Snyder said Boyd Gaming, which purchased Delta Downs in Louisiana in 2001 and installed slot machines at the track earlier this year, has a plan in place that calls for not only slots, but a conversion of Delta Downs into an entertainment destination for Louisiana and neighboring Texas. Delta Downs has about 200 acres that could become home to an entertainment and gaming resort, he said.

"Delta Downs will not just be a slot house," Snyder said. "Customers want choices. The more diverse you can make the entertainment, the better the operation will be in the long run."

A theme of the conference, presented by Global Gaming Business magazine, was that racinos, a relatively new development in the United States, have already evolved. Racetracks such as Dover Downs and Mountaineer Race Track & Gaming Resort have added hotels, conference centers, and live entertainment to the mix. That trend is expected to continue.

Dover Downs, which hosts both Standardbred racing and auto racing, is located in a small state with two other tracks with video lottery terminals or slot machines. It also is a short drive from Maryland and Pennsylvania, the two states where racetrack gaming is given a pretty good chance to be approved.

"The business has gotten so competitive now that you can't just have a warehouse with slots," said Denis McGlynn, president and chief executive officer of Dover Downs Entertainment and Dover Motorsports. "You have to have the resources available to the parties that run (the slots operations)."

The resources, primarily financial, come from tax rates that make it feasible to build facilities and hire gaming experts to run them. In Delaware, McGlynn said the state gets about three times what the tracks do in revenue from VLTs and slots, but the model works. After expenses, Dover Downs gets about 12% of net proceeds, he said.

The company also has a horse racing operation, something casinos with lower tax rates don't have to worry about, McGlynn said. VLT revenue is largely responsible for the $22.7 million in purses that will be paid at Dover Downs this year; the total daily average on-site handle of $70,000 could never support an average purse of $12,200 per race for 143 days of racing.

"There isn't much left over for horse racing," McGlynn said. "If we can keep it at a break-even, we're happy. The gains have solely come from the casino operation. Horse racing does give us something else to promote, but our (customers) largely come here because of the casino, not horse racing."

Edson "Ted" Arneault, president of MTR Gaming, which owns Mountaineer, has floated the idea of having table games at his West Virginia track to further expand the entertainment options. He indicated it's all part of the plan to cater to customers, but also to strengthen Mountaineer's status in the legislature and with the public.

"Legislators like to see that 'destination' part of it, because the alternative is convenience gambling," Arneault said. "We look at the product we offer as being driven by our first constituent -- the customer."

It was noted during the conference that even though Mountaineer and Wheeling Downs, a Greyhound track with gaming, are only about 30 miles apart, they don't compete for customers and are doing quite well drawing primarily from Ohio and Pennsylvania. Should Maryland get racetrack gaming, one analyst said he expects there to be plenty of money to go around even though neighboring Delaware and West Virginia already have gaming.

Steve Rittvo, president of the Innovation Group, said there is a potential annual revenue stream of $1.2 billion to $1.5 billion in Maryland, and that 80% to 85% of it would be "new money."

"There is tremendous latent demand in that market," Rittvo said. "We don't think the Delaware or West Virginia tracks would have to shut down their doors (if Maryland tracks get slot machines)."

Racinos have become a fast-growing segment of the overall gaming business in the U.S. For instance, the research firm Jeffries & Company said the four racinos in West Virginia (Mountaineer, Wheeling, Charles Town Races, and Tri-State Greyhound Park) comprised the fastest-growing market in the country with a 42% growth rate in 2001.