From: Dianne M. Berlin
OLG financial records raise red flag for Hamilton casino plan
The Hamilton Spectator’s Steve Buist investigates some surprising trends in the OLG strategy.
BySteve Buist
Ontario's four premier resort-style casinos have lost a combined $360 million in the past six years while handing out $1.6 billion in freebies and cash incentives to gamblers at those same facilities.
Meanwhile, the province's 17 racetrack slots facilities — three of which have closed and the rest face elimination or restructuring by Ontario's gambling regulator — and six smaller charity casinos have recorded $5.6 billion in profits over the last six fiscal years.
Since 2007, the 23 racetrack slot facilities and charity casinos have churned out average profits of $2.6 million a day while Ontario Lottery and Gaming Corp. has spent nearly $1.1 million a day over the same period on freebies, cash incentives, marketing and promotion just on the four money-losing major casinos located in Niagara Falls, Windsor and Rama.
The four major casinos have collectively lost money for six straight years and gone from recording a combined net profit of $108 million in 2006 to combined losses of nearly $80 million last year.
The recent trend of financial results for OLG's gambling operations raises important questions about the casino model being considered for Hamilton.
OLG is in the midst of a modernization process intended to overhaul the gambling industry in Ontario, particularly the types of facilities that will exist in the future.
For places like Hamilton and Toronto which currently don't have casinos, that likely means a swing away from a slot machines-at-racetracks model to full-fledged casinos with slot machines, table games and amenities that could include restaurants, entertainment and hotels.
In other words, a model that mimics OLG's four money-losing resort-style casinos.
Robert Williams, a University of Lethbridge professor and one of Canada's leading researchers on gambling issues, raises questions about OLG's change in strategy.
"To its credit, Ontario has held out and hasn't put a casino in Toronto and Hamilton because it doesn't make any sense from either an economic or social standpoint," said Williams, who obtained a PhD in psychology from McMaster University. "If this was such a good idea — placing casinos in Toronto and Hamilton — why wouldn't it have been done 25 years ago?
"To me it's more analogous to an addict running out of veins to tap."
OLG has divided the province into 29 zones and invited municipalities and the private sector to work together to create a new gambling landscape for the province.
First on the chopping block are the racetrack slot machine sites, which have helped keep horse racing tracks alive for the past decade thanks to the $345 million in slot machine revenues pumped annually into racing purses.
"As long as slots facilities are linked to individual racetracks, OLG is unable to consider alternate locations for gaming sites," according to an OLG background document. "Over time, this has resulted in the location of gaming facilities in places unrelated to customer interest."
About half of the remaining racetrack slots are located in smaller communities or rural settings, such as Flamboro Downs.
"Our world has changed so significantly and we cannot continue to sustain the business model that we have and be able to appease the customers," said Larry Flynn, OLG's senior vice-president of gaming.
"One of the disadvantages of our current model and why we need to modernize is that our customers are very sophisticated and they're very accustomed to the different offerings that resort properties would give both in the U.S. and beyond," Flynn added.
"The new model is about trying to find the right amenities in the right location in the areas where the majority of customers are situated so they're not driving a significant distance."
As part of its modernization plan, OLG wants to be more consumer-responsive, efficient and expand the private sector's role in gambling delivery. By 2017, it also wants to add another $1.3 billion in net annual profits directed to the provincial government on top of the nearly $2 billion already provided each year.
Debate over the possible location for a new Hamilton casino has divided residents between those who favour expanding the current Flamboro Downs site and those who prefer a downtown location to help spur additional development.
People in Hamilton are also split on the need for a casino at all. A Spectator telephone survey of 5,400 residents last fall showed 56 per cent opposed a casino in Hamilton.
Hamilton's business community appears to be just as divided as the rest of the city on the issue of a casino.
A survey of businesses conducted by the local Chamber of Commerce earlier this year showed a near-even split between those that did and those that didn't want a casino, and the same split between the downtown and the current Flamborough slots site as the location if Hamilton does proceed with a casino.
In February, Hamilton councillors designated Flamboro Downs as the preferred site for a new casino, but a downtown location could still be considered if private-sector bidders can show Flamboro Downs wouldn't be a viable option.
A month later, OLG announced that the racetrack slots program at Flamboro Downs would continue for another five years as part of a new agreement, muddying the waters in the short term on what might happen with any future casino proposal for Hamilton.
And just last month, Ontario's auditor general was asked investigate OLG on a number of fronts: everything from the transparency of the proposed casino expansion process, to the transparency of the payment formulae for host municipalities, to revenue projections, to the economic impact of cancelling the funding for the racetrack slots program.
Norm Schleehahn, the city's manager of business development and the point person on casino issues, declined to comment on OLG's financial performance and the implications for Hamilton.
"Unfortunately, I simply can not make comments on OLG actions related to casino operations, revenues and strategies," Schleehahn stated in response to an interview request.
OLG's modernization plan sank further into disarray last week with the surprise announcement that the Liberal government had abruptly sacked chairman Paul Godfrey. Within hours, OLG's entire seven-member board of directors resigned in protest
• • •
OLG's year-to-year financial results since 2007 raise some red flags about gambling in Ontario.
A Spectator examination of OLG's annual reports from the past six years shows:
• Attendance has taken a nose dive at Ontario's four resort casinos.
Between 2007 and 2012, the average daily attendance at the four casinos in Niagara Falls, Windsor and Rama has plunged by 25 per cent, from nearly 55,000 daily visits to just over 41,000.
Gaming revenue at the four casinos, not surprisingly, has taken almost the same hit. Combined gaming revenue fell from $1.69 billion in 2006 to $1.21 billion in 2012, a decline of 28 per cent.
Gaming revenue at the 23 racetrack slots and charity casinos has remained essentially unchanged for the past five years.
"The business has really been flat over the last number of years," said Flynn. "We certainly have tried to drive as much efficiency and manage the properties as best we can but like any business, you need to constantly look for ways to do it differently."
•OLG spends nearly four times as much on freebies and incentives at its four resort casinos than it does on the other 23 racetrack slots and charity casinos combined.
Between 2007 and 2012, OLG spent about $1.63 billion at the four resort casinos on so-called promotional allowances, such as cash rewards, gifts and free hotel rooms, compared to about $440 million at the 23 other gambling sites.
• In the past six years, OLG has spent $3.2 billion on promotional allowances, marketing and promotions for all of its gambling sites.
At the four resort casinos, incentives, marketing and promotions chewed up 31 per cent of all gambling revenue in the 2011 fiscal year.
At the charity casinos and racetrack slots, the proportion of gambling revenue spent on incentives, marketing and promotions was just 8.3 per cent.
• In 2011, OLG spent more than 14 times as much money on incentives, marketing and promotion as it did on promoting responsible gambling.
The practice of offering rewards to gamblers is a sensitive one, since those who qualify for the largest rewards are those who gamble the most.
A 2007 study co-authored by Williams and his Lethbridge colleague Robert Wood showed that more than a third of total gambling expenditures in Ontario come from problem gamblers, a tiny fraction representing less than 4 per cent of the overall gambling clientele.
"We're in the promotions or loyalty program business because it's something customers have grown to expect," said Flynn. "We understand there certainly are people with problems who game at our facilities and we've tried to put into place programs that would help them help themselves, like self-exclusion.
"We have certainly invested significantly more money than any other jurisdiction in North America in these programs we have and educating employees."
• Jobs are often cited as one of the spinoff benefits for communities that host a gambling facility.
But at Ontario's four resort casinos, the number of employees has actually declined by nearly 16 per cent since the 2007 fiscal year, from 11,790 employees to 9,931 last year.
At the racetrack slots and charity casinos, the number of employees declined slightly between 2007 and 2012, from 6,420 to 6,370.
That number will likely drop noticeably in the 2013 fiscal year, though, now that three racetrack slot operations have since closed.
The three that closed were in the border municipalities of Fort Erie, Windsor and Sarnia — a further sign that Ontario's gambling world has become more insular.
• OLG acknowledges that the bulk of its customer base is "aging rapidly," according to a 2012 strategic business review. Nearly 80 per cent of the gambling customer base is older than 50.
The conundrum for OLG? Nearly 90 per cent of its gaming revenue comes from slot machines, "which have limited appeal to players under 45," OLG reports.
In 2011, the average annual revenue per slot machine at the resort casinos was $96,600. At the racetrack slots, average revenue per machine was $156,000.
"It doesn't really matter where you put those things because the revenue per machine is roughly equivalent," said Williams. "It doesn't matter if you put these machines in a fancy casino or a racetrack or with table games.
"The less you spend on the accompanying structure, the more profitable you're going to be."
• • •
A money-losing casino? Surely it's an oxymoron, like jumbo shrimp or pretty ugly.
But it's not as far-fetched as you might think.
There's a cautionary tale to be found south of the border in the heavily populated tri-state area of New Jersey, Pennsylvania and Delaware — which encompasses the traditional gambling haven of Atlantic City and the large metropolitan areas surrounding Philadelphia and New York City.
A recent academic paper on gambling trends in the three states showed that gambling revenues in Atlantic City, which had a monopoly on casino gaming for decades, plunged when casinos opened a few years ago in Pennsylvania. As new gambling sites opened, they simply cannibalized business from other locations.
In just six years, gambling revenue in New Jersey fell by nearly half, dropping from $5.2 billion in 2006 to $3 billion in 2012.
The Revel casino in Atlantic City, built for $2.6 billion, opened just last year and it has already filed for bankruptcy protection.
But more importantly, the study also showed that the overall amount of gambling declined as well, even as the number of venues increased.
Now Pennsylvania, which poached a good chunk of its business from Atlantic City, is facing its own pressures. Gambling revenues in the state have dropped in five of the last six months compared to the same month a year earlier.
Here in Ontario, three of the four resort casinos — Windsor and the two in Niagara Falls — were strategically situated near the U.S. border to attract American tourists, particularly those from the border states of New York and Michigan, which didn't have gambling options nearby.
Since then, however, the Canadian dollar has risen to par with its American counterpart, gas is more expensive, passports are required to cross the border and casinos are now scattered across virtually every U.S. state.
Between 1998 and 2008, the number of Americans crossing into Windsor, for example, dropped by 74 per cent. There are also casinos now in Detroit and Niagara Falls, N.Y.
The days of relying on Americans as a reliable source of gambling revenue are likely over, according to Williams, the Lethbridge professor.
"It's a bit naive to think people are going to come to Ontario from anywhere else to gamble and spend multiple days at a hotel complex," said Williams. "No matter where you place your casinos, it's all going to be local people from here on in."
Williams believes large resort-style casinos no longer make sense in Ontario.
"Anyone who's going to gamble at any Ontario venue from here on in are going to be Ontario residents and they aren't going to spend a couple of days as would American tourists," he said.
"People are going to drive there and drive home."
Under OLG's new zoning model, there could be full-fledged casinos in Toronto, Etobicoke, Milton, Hamilton, Brantford and two in Niagara Falls.
Flynn said southern Ontario's population can support them, and he expects the gambling base to actually increase.
"I don't believe it will be just taking the same number of customers," said Flynn. "The full objective here is to be able to provide for those customers who aren't making a choice to participate in gaming because they can't access product when they want or the type of product they want.
Hamilton Ward 4 Councillor Sam Merulla, a spirited opponent to a downtown casino, says OLG's business plan isn't working. It's also objectionable, he added.
"Rather than targeting tourists, they're now looking at targeting Ontarians," said Merulla. "But what really becomes more insulting is that they cannibalize people in areas and in cities that are the most marginalized, such as Hamilton.
"OLG, from my perspective, governs themselves no different than a common crack dealer," he added.
It's not an analogy Merulla uses flippantly. While he's known primarily as a city councillor, Merulla is also an addictions counsellor by trade.
Merulla worries that those in the lower inner city, where poverty rates are highest, might not have had the opportunities to travel to the larger casinos in the past. With a casino easily accessible in downtown Hamilton, however, Merulla fears participation rates and social problems will inevitably increase.
"When you're trying to put a casino in a downtown core rather than leave it in Flamborough, what they're telling us is that we know there is a significant amount of people who are impoverished or vulnerable yet have some disposable income," said Merulla. "And we don't care how much that disposable income is, we just want a share of it.
"A crack dealer doesn't stand in the middle of Flamborough waving down cars," he said.
"They go into the heart of a city where the people are, to try to get them hooked."
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