Caesars Entertainment to Open a New Casino in Philadelphia

Case Type: business competition, competitive response.
Consulting Firm: Simon Kucher & Partners (SKP) first round full time job interview.
Industry Coverage: entertainment; tourism, hospitality, lodging.

Case Interview Question #00646: The client Caesars Entertainment Corporation (formerly Harrah’s Entertainment from 1995 to 2010, NASDAQ: CZR) is an American gaming and hospitality company that owns and operates over 50 casinos, hotels, and seven golf courses under several brands. With its headquarter located in Paradise, Nevada, Caesars is one of the largest gaming companies in the world, with annual revenues of USD $8.9 billion in fiscal year 2010.

Caesars Entertainment Corporation currently owns four casinos in Atlantic City: Bally’s Atlantic City, Caesars Atlantic City, Harrah’s Atlantic City, and Showboat Atlantic City. Recently, one of Caesars’ major competitors Trump Entertainment Resorts, Inc. is contemplating opening up a rival casino in nearby Philadelphia.

The CEO of Caesars Entertainment has hired Simon Kucher & Partners to assess the ramifications of competitor Trump Entertainment opening a casino in Philadelphia. Also, what are Caesars Entertainment’s strategic options to respond?

Question #1: What are the ramifications for existing revenue if a casino opens in Philadelphia?

Additional Information:

• Currently there are no casinos in Philadelphia. There are many competing casinos in Atlantic City but they are not relevant because it is a mature market.
• Atlantic City has a 25% tax on gambling revenue. Philadelphia has a 50% tax on gambling revenues.

Possible Answer:

In order to assess the implications of a new casino in Philadelphia on Caesars Entertainment we need to understand the following:

1. Revenues

• What are the revenues of the client Caesars Entertainment?
• Where do their revenues come from (type of services, etc)?

2. Geographic Location

• Where is Philadelphia located in relation to Atlantic City?
• Where are the revenues from Atlantic City coming from geographically?

3. Customers

• Who are the customers of Caesars Entertainment and how the customers may consider going to competition in Philadelphia?
• How many customers do they have now and how many they can lose to competitions?

Additional Information: (to be provided only on request)

• Caesars Entertainment’s revenues from the 4 casinos in Atlantic City are $1.2 Billion
• The majority of revenues come from 4 cities: Atlantic City, Philadelphia, Jersey City, New York City (show slide)
• Jersey City and New York City are nearby, approximately 1 hour from Atlantic City. They are both ~2 hour from Philadelphia. Philadelphia is ~1 hour from Atlantic City. There are no casinos in New York City or Jersey City due to city regulations.
• Customer base is 1.8 million per year (Customer Segmentation is a key insight).

Note: do not let the candidate become bogged down into calculating costs and estimating profits.

Customer Segmentation Exhibits to be given upon request:

A. Figure 1. Geographic segmentation of Caesars Entertainment’s customers, based on revenue distribution among the four cities (New York City, Atlantic City, Jersey City, Philadelphia)

B. Table 1. Psychographic segmentation of Caesars Entertainment’s customers, based on customer type

• Plug and Chuggers: Hard Core gamblers who only want to gamble and care most about convenience (assume casino payouts are identical across the board)
• Vacationers: want to “get away” and leave the area for a week or weekend
• Experiencers: want to live the casino experience (lights, shows, action, etc) and are interested in the casino itself and what it has to offer

Other Additional Information given upon request:

• All customers can be considered evenly distributed across the four cities
• Conversion information: (before giving this information ask the candidate for his/her opinions)
  • Philadelphia Plug and Chuggers will shun Atlantic City for the new, closer casino (100% conversion)
  • Philadelphia Vacationers want to get away so would not go to the Philadelphia casino (0% conversion)
  • Philadelphia Experiencers may or may not go somewhere else — a range of answers is accepted but assume 50% for the calculations (50% conversion)
• Important: assume that the additional drive time from New York City or Jersey City to Philadelphia will deter any significant number of those customers from defecting to Philadelphia.

Calculations and Insights:

Revenue Lost = Current Revenue * Philadelphia Revenue Share * Conversion Rate

Therefore, a competitor’s casino in Philadelphia will reduce the client’s overall revenues by $135 million.

However, if Caesars Entertainment decides to build their own casino in Philadelphia, it will steel share from itself and lose some revenue due to the tax rate difference in Atlantic City and in Philadelphia. Since Atlantic City has a 25% tax on gambling revenue and Philadelphia has a 50% tax on gambling revenues, the revenues lost to taxes would be: $135 million * (50% – 25%) = $33.75 million.

At this point, the candidate should realize that it is better for Caesars Entertainment to lose $33.75 million than $135 million.

Question #2: What are the client Caesars Entertainment’s options?

Possible Solution:

From the above analysis, the client Caesars Entertainment could either

• Do nothing, or
• Open a casino in Philadelphia

The candidate should understand that it is more desirable to cannibalize within the company than to allow outside competitors to steal the revenue and market share.

Final Recommendation:

Caesars Entertainment should open a new casino in Philadelphia. The new casino will only affect the customers in Philadelphia due to the geographic area. The customers depending on the segment will react very differently to the opening of a new casino in Philadelphia and all these needs to be assessed. However, there are some risks associated:

• competitor opens the casino first and gets the 1st mover advantage by opening their casino earlier.
• there may be high costs of construction or operation of the new casino in Philadelphia.

Bonus Question #3: How can the client Caesars Entertainment make up for the lost revenues?

Possible Answer:

To make up for the lost revenues, the client could:

• Charge an entrance fee to their existing casinos
• Eliminates amenities (e.g. free drinks)
• Increase other revenue streams (food, hotel, show, etc)
• Stimulate new customer demand through:
  • Customer loyalty programs
  • Promotional giveaways
  • Increased marketing
  • Targeting customers in cities near Philadelphia but far from Atlantic City or vice versa
• Steal market share from existing competing casinos in Atlantic City through similar means as listed above.