Gamblers play the slots Feb. 9, 2012, at Dover Downs Hotel and Casino.(Photo: Jennifer Corbet, The News Journal, Wilmington, Del.)
DOVER, Del. — Struggling to stay afloat, Delaware's embattled gambling industry has pushed a simple message at state lawmakers here: Help us, or workers will be laid off.
But the reality is much more complicated and troubling for Delaware's casinos. Gaming revenue in Delaware fell sharply in 2012. The first half of 2013 has been even worse.
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And darker days could lie ahead for the state's three casinos in 2014 and beyond as competition from other states intensifies. Some degree of layoffs could be inevitable in the near term, no matter what action legislators decide to take.
Casino operators have asked for a reduction in slot machine taxes from 43.5% to 37% and, so far, have been rebuffed. Earlier this week, Delaware Gov. Jack Markell instead offered a one-time $8 million payment split between the three.
Based on a review of casino finances and interviews with multiple gaming-industry researchers, the future of gambling revenue in Delaware appears bleak.
"This is applying a Band-Aid to a bullet-shot wound," said Jay Masurekar, an investment banker who tracks the gaming industry for KeyBanc Capital Markets.
Masurekar's comments echoed those of several researchers and investment analysts who study the casino business.
The slots and gaming tables at Dover Downs haven't been drawing the number of customers that they did last year.(Photo: Gary Emeigh, The News Journal, Wilmington, Del.)
They agreed a lower tax rate would help this state's casinos free up cash to invest in upgraded facilities — the state's first casino opened in 1995 — and retain as many customers as possible. But it would not be enough to offset the losses. Expenses and probably employees still would need to be cut.
Had the 37% rate the casinos desired been in effect this year, it would have saved the three operators about $10.2 million in payments to the state.
However, total slot revenue, the largest source of income for the casinos, is down more than $47 million between January and May compared to the first five months of 2012, according to statistics from The Delaware Lottery, which oversees the industry. The proposed $8 million one-time payment, divided between the three, would barely make a dent, experts said.
"I think they've got to be looking at layoffs," said James Butkiewicz, a University of Delaware economics professor who has studied the state's gaming industry. "I just don't see how they don't."
At the end of 2012, Delaware was one of 23 states with commercial casinos, not counting Indian casinos. In 2002, the first year that the American Gaming Association tracked Delaware casino revenues in its State of the States report, 15 states had them.
Competition
While the state's slots taxes are higher than most states, Delaware's biggest problem is the fierce competition for gamblers in the Mid-Atlantic states, experts said. Pennsylvania got into the gaming business seven years ago. Now a small casino in Perryville, Md., is siphoning off customers from the Casino at Delaware Park, and the new, spacious Maryland Live! in Hanover, Md., has decimated Dover Downs Hotel & Casino. The smaller Harrington Raceway & Casino also has suffered under new competition.
After requests for comment Tuesday and Wednesday, a Dover Downs spokeswoman said none of the company's executives would be made available for interviews. Delaware Park and Harrington officials did not return phone calls.
The difficult environment is especially apparent for Dover Downs Entertainment (DDE), Delaware's only publicly traded casino. The casino used to draw more than a third of its gaming revenue from Maryland customers, according to U.S. Securities and Exchange Commission documents.
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Almost two-thirds of the revenue from its high-spending players, called Capital Club members, came from out of state.
In the first five months of 2012, Dover Downs slots revenue was up more than $3.2 million from the previous year. Then in June 2012, Maryland Live! opened. In the last seven months of 2012, Dover Downs slots revenue declined almost $13 million.
Last year Maryland casinos as a whole already surpassed Delaware casinos in revenue by about a million dollars, according to American Gaming Association figures. Its take was up almost 144% from 2011; Delaware's was down by 5.5%.
So far in 2013, Dover Downs' slots revenue has fallen $22 million. In the first quarter, the company reported a net loss of $283,000.
"It's not a destination anymore. It's just a convenience gambling site," said Chief Executive Rob Heller of Spectrum Gaming Capital, a firm that analyzes gaming companies for investors. "If people have to drive past Maryland Live! to get to Dover, it's just not going to happen. You've lost those guests."
Table games opened up to public at Dover Downs Hotel and Casino on June 25, 2010.(Photo: Gary Emeigh, The News Journal, Wilmington, Del.)
The industry's decline has serious implications in a state that relies on gambling as a significant revenue stream and employer.
Casino and racetrack gaming, which also includes table games and sports betting, contributed about $193 million to the state budget in the most recent fiscal year, according to the Delaware Economic and Financial Advisory Council. Out of every dollar the casinos win in slots, the state gets 43.5%, 10% finances purses for horseracing tracks, 6% goes to slot machine vendors and the casinos keep 40.5%. The state gets a 29.4% cut of the less-lucrative table games.
As of December, Dover Downs employed 898 full-time and 391 part-time workers, according to SEC filings, making it one of the largest private employers in its county. Combined, the three casinos are estimated to provide about 3,000 jobs.
It will be difficult — perhaps impossible — for Delaware's gambling industry to return to the revenue it generated five to 10 years ago.
Will get worse
As bad as the first half of the year has been, Delaware has yet to feel the full effect of competition from Maryland, said Frank Fantini, publisher of Fantini's Gaming Report. He's also CEO of Fantini Research, a Dover-based investment research firm.
Maryland Live!'s opening in June 2012 means Dover Downs faced stiff competition only in the second half of last year and now will have a full year of competing head to head. To make matters worse, Maryland Live! added table games in April, and most casinos don't reach their full strength until two or three years after opening, Fantini said.
“The competition is bad, and it's only going to get worse.”
— Frank Fantini, Fantini's Gaming ReportCasinos spend their first few years gathering the data on players they need to launch targeted promotions and marketing campaigns, Fantini said. Maryland also plans to open more casinos in the future.
"The competition is bad, and it's only going to get worse," Fantini said. "You can expect that Maryland Live! is going to become a stronger competitor."
Before the beginning of Maryland gaming in 2010 and Pennsylvania casinos in 2007, Dover Downs built its business model around attracting gamblers from other states, experts said. It invested heavily in adding amenities — such as a luxury hotel, spa and fine dining — to draw out-of-town players. The strategy could leave them vulnerable if their customer base is reduced to local players.
The company is carrying $56.5 million in revolving debt. The company's diminishing profitability triggered provisions in its credit agreement, according to SEC filings. As of March 31, the casino is forbidden from issuing dividends and had its credit limit reduced by $5 million.
Dover Downs stock plummeted 21% since January, and in the past year the casino's two largest outside stock owners have cut their holdings by more than 170,000 shares, according to Bloomberg data.
"The investment community out there doesn't see a lot of potential in it," Fantini said.
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Delaware casinos' competition
Delaware casino gambling, which began in 1995, was meant to bring jobs and revenue to this state rather than Atlantic City, N.J., which opened its first casino in 1978. But now the Mid-Atlantic has far more places to play slots and table games.
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