INNOVATION INN-SIGHTS | Will Gaming Expansion in Illinois Lead to Market Saturation?

June 24, 2019

Digesting Gaming Expansion in Illinois: The SB690 Puzzle

Now that the notion of broad gaming expansion in Illinois has settled in for several weeks, The Innovation Group team has had the opportunity to assess Illinois Senate Bill SB690 and its potential implications politically, and quantitatively within the market. While SB690 has yet to be signed by Governor Pritzker, and the process for implementation remains unclear, what we can say for certain is that the legislature has handed its communities and the industry a puzzle.

Numerous law firms and consultants have offered expository reviews of the contents of SB690 and broad potential implications for stakeholders. But what is missing - and what we seek to address in the following brief - is a preliminary assessment of: (1) the most likely response by communities and the industry, (2) whether the bill is likely to bring market saturation, and (3) whether meaningful returns can be achieved.

Refresher on the Basics of the Bill
Although SB690 is only a few weeks old, it is complicated and warrants a recap of the key tenets as a precursor to our analysis. There are many details related to the distribution of new casino licenses, temporary casinos, minority ownership, expansions at existing casinos, pari-mutuel racing venues, Video Gaming Terminals (VGTs), airports, sports betting and live sports venues, and in each category related taxes and fees (including admissions, privilege and reconciliation fees). We have attempted to distill the main points below:

New Casinos: Six (6) new casinos with one located in each of the following: City of Chicago; City of Danville; City of Waukegan; City of Rockford; one only between the townships of Bloom, Bremen, Calumet, Rich, Thornton, or Worth; and Williamson County.

Other than the City of Chicago, which will require a Feasibility Study, applications are to be submitted to the Illinois Gaming Board (IGB) within 120 days of SB690 becoming law with issuance to occur within 12 months of submittal.
Gaming positions are capped at 2,000 for new casinos other than Chicago (4,000) and Williamson County (1,200).
Temporary casinos are allowed for up to 24 months with 12-month extensions available subject to approval.
O'Hare and Midway Airports may operate slot machines, beyond security check points, in association with the Chicago license.
A host of taxes and fees will be levied in ranges more or less consistent with the historically assertive rates assessed in Illinois.
Minority ownership and local approvals are required.

Existing Casinos: Current operators may move from waterways to land-based facilities and add up to 800 positions each, increasing the current limit of 1,200 positions to the new maximum of 2,000. Taxes and fees apply, and limited hold harmless criteria are available to existing properties to mitigate competition. Promotional fees can be deducted from Gross Gaming Revenue (GGR) up to 20% before the assessment of taxes going forward.

Pari-mutuel Racetracks: Each may operate slot machines and table games comprising up to 1,200 positions at racetracks located within Cook County (Arlington Park, Hawthorne and one new racetrack within the Cook County townships plus Orland), and 900 gaming positions at Fairmont Park and Quad City Downs. Other criteria related to the application process, temporary operations, and taxes and fees are similar to those applied at new casino locations.

VGTs: Each existing location may operate one additional device (for a total of six) and truck stops may operate up to ten. Minimum bets will be increased from $2 to $4 and payouts increased to a maximum of $1,200 from $500. Progressive jackpots will also be added. Taxes eventually will be increased to 34% from 30% today.

Sports Betting: Licenses may be issued for on-site sports wagering to any casino, racetrack (including up to three OTB's), major sports facilities, three new online sports betting licensees, and at retail lottery locations on a provisional basis. Fees and taxes vary significantly by facility type.

How Much Room for Growth?
At first glance, the potential results of implementing SB690 can seem daunting. The bill is one of the most expansive incremental gaming laws ever introduced, with passage of the legislation originally only half-expected. To understand the impact of this expansion, we compare the Chicagoland and Illinois markets to other markets throughout the US on supply and performance in the following tables. We use three metrics to illustrate this comparison: (1) Positions per 1,000 adults, (2) Win (or gaming revenue) per adult, and (3) Win per position. In these comparisons, we include position estimates for Illinois pre-expansion and post-expansion, though in this piece we do not forecast gaming revenue in the post-expansion market. Our post-expansion supply forecast excludes expansions at existing casino properties, but we have assumed all new available positions would be developed, even though on balance this is unlikely. Overall, we conclude that there is room for additional absorption in the Illinois market, though here we do not analyze the potential return on investment for this development.

Comparison 1: Chicagoland vs. Other Regional Gaming Markets

First, we looked at Chicagoland, including northwestern Indiana, to see how the market, including its VGTs, compares to other gaming cities. As indicated below, Chicagoland's supply penetration would increase from 2.9 positions per 1,000 adults to 4.7. Even with this major expansion in supply, Chicagoland will still have fewer positions per 1,000 adults than four of the six comparable markets we evaluated. Chicagoland's current win per adult is the lowest on the list, yet its win per position is on the higher side at $295.

Comparison 2: Illinois vs. Other Regional Gaming States - Casinos Only

Next, we looked at casinos only in several commercial gaming states, excluding any VGTs for comparative purposes. Among the markets evaluated, Illinois' supply penetration would increase from 1.2 positions per 1,000 adults to 2.5. With more than a doubling of casino supply, again, Illinois will maintain a moderate number of casino positions per 1,000 adults compared to four other gaming states. Like we saw in Chicagoland, Illinois currently has low win per adult and high win per position.

Comparison 3: Illinois vs. Other Regional Gaming States - including VGTs

Finally, we evaluated commercial gaming in VGT gaming states, including casino and VGT positions. Among the markets evaluated, Illinois' supply penetration would increase from 4.4 positions per 1,000 adults to 5.7. Here, in addition to the existing gaming market yielding less than half of the win per adult realized in West Virginia and Louisiana, Illinois' post-expansion market will continue to exhibit a lower ratio of positions per 1,000 adults than West Virginia and Louisiana, further indicating reasonable room for absorption.

While the above exercise does indicate supply elasticity in Illinois, we would note that new revenue will come at a higher cost, both in terms of additional taxes and fees, and marketing expense (partially off-set by the promotional allowance deduction and hold harmless). New operations will face a difficult ramp-up until front-end fees are balanced, and in every case, we believe extremely careful business planning and capital budgeting will be necessary.

Market and Political Gaming Underway

Multiple scenarios could play out given the many different forms of gaming and changes to existing supply that may be undertaken. In the case of new casino and pari-mutuel licenses - where the spoils are mostly concentrated - communities, developers, and operators are already working together expeditiously.

New Opportunities: Designated host communities like the City of Chicago, Rockford, and Waukegan have been evaluating casino opportunities for some time. The path forward in these markets is a matter of planning and capital risk. But in the townships south of Chicago, the environment is more frenzied given the large number of mutually exclusive options for direct licensure and revenue sharing between communities. Many of the parties looking at these suburban markets are newcomers to Illinois and in some cases to casino gaming, with the notable exception of the City of Chicago, where despite difficult economics and development challenges, we fully expect the major industry players to take a hard look at how to potentially embrace the market.

Existing Properties: Established operators in Illinois, particularly in suburban markets like Joliet, Aurora, and Elgin, are facing more of a conundrum. These markets have historically been supply-constrained, where the fight for additional gaming positions and migration to landside dates back two decades. However, with the addition of VGTs to the market and the opportunity for expansion tied to new casinos, the lines are finer. These operators are essentially being invited to expend capital with the risk of a lower return and volume of EBITDA. Still, we believe that creative and efficient improvements could reward existing operators even in the face of increased competition.

Sports Betting: The trajectory for sports betting in Illinois is unique in the post PASPA era. Sports betting faces moderate margins even in markets where competition is limited to bricks-and-mortar operators with all betting on-site. We have been advising clients to provide thoughtful sports betting amenities in these locations largely to add to the overall guest experience. However, Illinois is introducing sports betting on-site, wirelessly off-site, and in lottery retail locations (both rare so far in the US), and within or near large sports venues. This distribution is likely to homogenize sports betting. Each opportunity will be exploited to maintain a competitive position, but below average profitability is likely.

What is Your Next Move?

If you are interested in discussing the Illinois market further or learning more about The Innovation Group's gaming market feasibility, development support and business planning services, please contact us. We would be happy to talk.