8 Sep

Must-know: A casino’s risk factors

WRITTEN BY Shawn Bolton

Discretionary consumer spending effect

The casino business is sensitive to reduced consumer spending. Reduced spending can be caused by economic downturns. Consumer demand for hotels, casino resorts, and luxury amenities is also impacted by the state of the economy.

This could impact major casino players like Las Vegas Sands (LVS), MGM Resorts (MGM), Melco Crown Entertainment (MPEL), and Caesar Entertainment (CZR). Exchange-traded funds (or ETFs) like the VanEck Vectors Gaming (or BJK) and the Consumer Discretionary Select Sector SPDR Fund (XLY) track the performance of leisure companies. The ETFs could also be impacted by an economic downturn.

Must-know: A casino’s risk factors

The above chart shows that in 2012, consumers spent more at commercial casinos than they did on movies, craft beer, and outdoor equipment combined. However, consumers spent less on casino gambling than what they spent on full-service restaurants or consumer electronics.

Changes in discretionary consumer spending could be caused by many factors. These factors include:

  • weaknesses in the job or housing market
  • additional credit market disruptions
  • high energy costs
  • fuel and food costs
  • increased travel costs
  • the potential for bank failures
  • recession fears
  • changes in consumer confidence in the economy
  • fears war and terrorism

These factors could reduce consumer demand for luxury amenities and leisure activities.

Political effect

The casino business is prone to extensive regulations. The compliance costs—or the cost of not complying with regulations—may have a negative impact on the business, financial conditions, operations, or cash flows.

The casino business is sensitive to customers’ willingness to travel. As a result, acts of terrorism, regional political events, and conflicts in other countries could disrupt air travel. This would reduce the number of casino visitors. Fewer visitors could hurt the casino’s financial conditions, operations, or cash flows.

The business is also subject to taxation and regulation by various government agencies—primarily in Macao, Singapore, and the U.S. The government agencies include the federal, state, and local levels. U.S. federal, state, local, and foreign governments change tax rules. Changing rules could result in higher taxes than existing tax laws. Changes in tax laws and regulations could have a severe impact on the business’ financial condition and operations.

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