Report using the five forces model of Ceasars Entertainment
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As the CEO of Ceasars Entertainment, much of the information in this report on the casino and gaming industry will sound familiar to you. To expound upon traditional industry data this report utilizes the five forces model developed by Michael Porter along with a general environmental trend analysis. Porter’s renowned forces include threat of entry, buyer power, supplier power, threat of substitutes, and the intensity of rivalry in the industry. When coupled with an analysis of the changing nature of the casino industry these forces make for powerful tools to evaluate the overall attractiveness of the casino industry.
The first aspect of the Five Forces Model is threat of entry. Due to the nature of the industry, there are very low switching costs. In the United States legalized gambling is restricted to certain areas so all competitors are bound to the same geographic boundaries. This gives buyers a tremendous amount of flexibility. Furthermore, differentiation of one’s product has a relatively short life span. This is illustrated by the expectation of above average returns on a new casino or remodeled area of the strip in Las Vegas for only one to two years.
So companies are constantly forced to open new locations, remodel, or reinvent in order to keep a competitive advantage on the competition. Because of this, the capital requirements in this industry are extremely high. Caesars spent $260,000 million on a remodel of their hotel in Las Vegas, along with other tangible resources being used to update their other locations on the strip. Overall, it is safe to conclude that the overall threat of entry into this industry is low. The next of the five forces is buyer power. The buyers in the casino industry can be segmented into two rough groups.
The high rollers, or “whales”, which are the top 5% of gamblers, account for 15-20% of total revenues. (1) The low 1. 25% house edge (in baccarat, the whale game of choice) creates a situation where it is necessary for casinos to keep the high-rollers gambling for long periods of time, in an effort to take advantage of the law of averages. (1) The normal gambler spends the most money at the slot machines, which make up 60% of revenues. (2) Large and fragmented, this group now has more power because of an increasing ability to compare hotel rates over the internet.
The similarity of casino floors has caused casinos to try to differentiate themselves by offering “themes” and new machines. Along with comps, casinos try to add switching costs to the slot playing gambler by offering cards that give perks to players based on accumulated slot plays. Overall, because of the similarity of casino end products and lack of ability for true differentiation, both groups of buyers exert power, with the whales exerting significant power because of their proportional per capita revenue generation. Therefore, the force of buyer power is strong in the casino industry.
Following Porter’s Five Forces Model, another major aspect of Caesar’s industry attractiveness is supplier power. Evaluating the supplier power in a large casino/resort does not present any straightforward answers. Supplier power is paradoxically quite low, as well as quite high. Many of the resources used by the organization come from nearly perfectly-competitive industries. There is little differentiation in pillows for hotel rooms, foods for the restaurants, and plastic casino chips. Guests do not even differentiate between slot machines for the most part.
However, entertainment is, and always has been, a significant part of the casino industry. Recent entertainers at our flagship location, Caesars, have included Jerry Seinfeld, Celine Dionne, and Elton John. As they are highly differentiated and not easily substituted, they hold considerable power within the industry – much more so than the pillow manufacturers. Moreover, there is a moderate threat of forward integration. Recently, Alliance Gaming, a casino supplier, has become more involved in casino operations, thus becoming a direct competitor within the industry.
Supplier power can conservatively be placed in the medium range for overall industry attractiveness. The threat of substitution begins with riverboat casinos and “horse and dog races. ” Absorbing $9 billion, $3. 5 billion and $500 million respectively, of consumer spending, such activities pose a legitimate threat to the hotel/casino industry. Further, would-be resort/casino patrons looking for another alternative may also be tempted to gamble at Native American Casinos on tribal reservations.
A different option for gambling aficionados in the wake of the Internet has become online gambling. Internet gambling now accounts for over $2. 21 billion in sales every year. Another major substitute is the state lottery. Total lotteries make up 28% of revenues for the gambling industry as a whole. That means over $17 billion was spent outside the reach of the hotel/resort and casino industry. Under the broadest definition of this industry other forms of entertainment could include family trips to Disney Land or spring break vacations in Cancun.
These will continue to be alternatives for the same target market. Clearly, there are significant substitutes vying for the disposable incomes of would-be gamblers, however the industry has taken steps to mitigate this force by directly competing with some of these substitutes. For example, there have been several acquisitions of riverboat casinos, dog/horse/auto racing companies, and tribal casinos. Many of the casinos have even structured themselves as theme parks to directly compete with family vacation destinations.
Due to these steps, the threat of substitution can legitimately be placed as medium. Caesar’s Entertainment is rivaled by three main competitors: The MGM Mirage, Mandalay Resort Group, and Harrah’s Entertainment. All of these competitors contribute to the strong rivalry in the industry because amongst other reasons, all four have the capital resources to compete for long periods and on both tactical and strategic levels. All four companies continue to rival each other by continuing to try and differentiate themselves.
There is an estimated 500 legal casinos operating currently in the United States. Competition is great in number, yet the four top competitors are in a league of their own, generating millions more than their smaller competitors. The industry grew at a rate of 1. 4% from 2002 to 2003. However three out of the four resort casinos experienced a loss in sales growth. The casinos are fighting intensely to acquire any amount of market share as a means of reversing this trend. Fixed costs are another contributor to the intense rivalry of the industry.
All resort casinos will experience high fixed costs. Some examples of fixed costs are: payroll, ongoing costs of property taxes, insurances, depreciation and amortization, interest, rent, equipment lease. A large portion of a resorts labor costs are needed for the resort to even open its doors to serve guests. Exit barriers are likely to be high in the resort casino industry. It would be difficult to find a buyer for a multi-million dollar casino. Another exit barrier could be the labor union in which most employees are members of.
Termination costs for thousands of employees would be extremely high. This serves to keep companies within the industry and forced to compete rather than fold. In sum, the rivalry within this industry is quite high. The casino industry has undergone rapid changes over the past decade. Changes in population structure, legal rules, and technological developments have established new opportunities for growth in the industry. The most important changes have occurred in the legal, governmental, and technological. State budget deficits are growing at a fairly rapid rate.
According to the Center for Budget and Policy Priorities, “States are facing budget deficits in the range of $70 billion to $85 billion for state fiscal year 2004. ” Moreover, many states have balanced-budget amendments that will ultimately force them to either make program cuts or create revenues. According to the National Gambling Impact Study Commission’s Final Report, “the gambling industry has emerged as an economic mainstay in many communities and plays an increasingly prominent role in state and even regional economies.
Further, “a new casino of even limited attractiveness, placed in a market that is not already saturated, will yield positive economic benefits on net to its host economy. ” BusinessWeek predicts that the industry will undergo major expansion due to many state legislatures’ urgent need to find revenues. There has been a trend in deregulating the industry at the state level, evidenced by Pennsylvania, New York, Massachusetts, and Maryland, while Illinois and Missouri are considering issuing more casino licenses.
This certainly adds to the industry’s attractiveness in its ability to grow and diversify. Vastly important to the casino industry are the changes in the legal environment over the past ten years. Legalized gambling has increased over the past ten years in response to favorable gambling legislation. Two extremely important developments were the legalization of riverboat casinos and tribal casinos. Both of these segments have grown quickly with tribal casino revenues increasing 34. 7% (2) over the past three years.
Diversification and mergers have allowed established casinos to capitalize on this influx of different types of casinos. (9) Globally, the de-monopolization of Macau, presents an opportunity for American casinos to penetrate the Asian gambling market. (7) Unfortunately, Vegas-Style casino openings in the United Kingdom were denied when parliament ruled against expanding casino operating rules. (8) Overall, changes in the legal environment have led to extreme growth in the casino industry, but the potential for drawbacks in increased taxes unfavorable legislation continue to be a threat.
Finally, changes in the technological environment have added to the growth of the industry. The ability of casinos to switch to coin less slot machines has helped reduce labor costs associated with maintenance of the old machines. (2) The growing information technology sector has enabled casinos to implement comp cards in an attempt to increase switching costs and feed important gambling information into data warehouses. New techniques for analyzing this data allowed casinos to tailor specific promotions and offers to specific customers.
However, the rise of the internet has hit the casino industry particularly hard, enabling price comparisons and offering an alternative venue for gambling in internet casinos. (2) For the most part technological developments have helped the casino industry over the past ten years, but the additional threat of internet competition is troublesome. The casino changes in the casino industry over the past ten years have been numerous, but the future may tell a different story. What was once growth in casinos may represent a saturation of the market and a dilution of established casino’s customer base and novelty.