Circus Circus

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CIRCUS CIRCUS ENTERPRISES, INC.

Circus Circus is currently in a very mature industry that is highly competitive and the company needs to diversify to protect itself from new government regulations and a further decline in the supply of customers. According to management, Circus Circus is in the business of entertainment, and has as a core competency the ability to develop ideas that are desirable to the customer. This is exceptionally important in a time when customers desire entertainment that is fun and exciting for the whole family. Furthermore, Circus Circus has the resources and capabilities necessary to accomplish this task. By eliminating the casino from the hotel resort the company would have the ability to go anywhere in the U.S. without any government restrictions regarding legalized gambling. By focusing on the companies core competencies and abilities, Circus Circus has the opportunity to eliminate many of the threats and focus on the opportunities that are offered while still managing to obtain the goal of growing the entertainment resort.

Since management still considers casino gaming to be a core strength, Circus Circus should aggressively expand into the Mississippi region. This is expected to be the only growth potential in the future as the rest of the country is under heavy competition resulting from over saturation. Management should also consider looking into the opportunity to expand into the Atlantic City market. This is the second largest market in the US and Trump Hotels & Casinos are currently looking to get out of the industry. This would be a great opportunity to gain a significant handle on the Atlantic City region. Both of these recommendations are consistent with management's objectives and are obtainable given the current financial status of the company. Both options would increase the financial strength and growth potential for the company, especially the Mississippi area.

The environment and industry dynamics in which Circus Circus competes are undergoing significant changes that will effect the ability for the company to sustain above average returns. The gaming industry is in a mature stage of development and is characterized by increased regulation, political pressure, changing attitudes, slow growth, and tight competition.

One of the main concerns facing the gaming industry has been the change in political attitudes. A two-year commission has been established to provide recommendations for legislation and administrative action. The six areas of concern, described in [Exhibit 1]; could have serious consequences to the industry. Contributions to the Republican Party have raised serious concerns among conservatives and according to Ralph E. Reed Jr., "Any Presidential candidate who receives casino support is going to come under heavy fire." [Business Week, Oct 98] Increasing opposition strength has led to increased gaming restrictions [Exhibit 2]. "Legislatures and regulators have reacted in a number of ways that clearly signal a desire to pause the pace of casino development, to increase governmental returns from casinos through increased taxation and, in general, to place constraints on the casino industry." [Sun Herald, May 98] This changing political landscape is a threat to the gaming industry and some believe lawmakers could attack the gambling industry as they did with the tobacco industry.

The previous benefits from legalized gambling are becoming less of an issue. The current strong economy and low unemployment eliminates the need for casinos to provide additional jobs and tax revenues. There is also a growing concern that gambling is a regressive tax. A study shown in [Exhibit 3], illustrates that the lower income individuals pay a much higher percentage of their income than the more wealthy. The evidence shows that as casinos become more available, the poor become more attracted to these activities. [Public Finance Review, 98] This study shows the negative effect of gambling on the poor and it has been suggested that new legislation require a substantial entrance fee for casinos to deter involvement. This is a significant threat because much of the companies' focus was originally to the lower income families. The results of a study on crime relating to casinos in Atlantic City show that from 1977 to 1990, the levels of crime increased significantly more than the country average. [Exhibit 4] Atlantic City went from a rank of 50th in crime per capita to 1st. These arguments further back up the opponent's arguments and strengthen the case for further regulations.

An interesting trend facing the gambling capital of the world is that most vacationers going to Las Vegas are families who are looking to be entertained by the fantasy themes, and not necessarily to gamble. [Credit World, Mar 97] These customers want the excitement of the Broadway Style Shows, restaurants, and retail stores. "According to a 1996 report, 67 percent of people went to Las Vegas for vacation/pleasure in 1995, but only 4 percent said their primary intention was gambling." [Credit world, Mar 97] A reason behind this could be the expansion of legalized gambling to other parts of the country. There exists the opportunity to expand into other forms of entertainment such as luxury resorts for families. Another problem facing the Las Vegas region is that the McCarren Airport is becoming less willing to sell tickets to the economy-minded Vegas-bound vacationers. The airport has a limited number of seats available and is more interested in selling more expensive tickets to business customers.

The five competitive forces presented in [Exhibit 5] show five factors that effect the industry competitive situation. This exhibit demonstrates that there is a threat from substitution. Internet gambling is a rapidly expanding market and resulted in $143 million in 96 and is expected to climb to $760 million by 2000. [Economists, Dec 98] This could present an opportunity if Circus decides to pursue this option. The exhibit also mentions that rivalry is very competitive because of a lack sufficient demand. The number of visitors in Las Vegas has leveled off at roughly 30 million a year. [Barron's June 22, 1998] "In 1997 the strip has seen a 12% increase in market supply, while only about a 5% increase in visitor volume" [Investment Dealers, Sep 97] The threat is that this could lead to reduced margins and a loss of customers. There does exist an opportunity to expand in one market where supply has not yet reached demand. There are estimates that the Mississippi coast casinos are expected to reach revenues of $1.2 billion by 2002, a 58 percent jump from 1997. According to analyst Jason Ader, "We believe the (Coast) market will continue to become increasingly popular as a destination resort." [Sun Herald, May 98] Circus Circus is a strong company with many important resources and capabilities that allow it compete successfully in the gaming industry. One of its most valuable capabilities is its ability to produce high-quality theme-resorts that attract vacationers. Each of its locations has a distinctive personality, which is what attracts so many customers. This reputation as a quality provider of entertainment creates a sustainable competitive advantage which is valuable, rare, costly to imitate, and non-substitutable. This is very important in this industry because most people who travel to Vegas go for the entertainment, not just gambling. It is also this ability which protects it from new entrants because it is very difficult and costly to develop these very expensive resorts.

One of Circus's key resources is its management. Management is responsible for creating the new ideas and themes that make Circus so successful. With the strong cash position, management is able to make their ideas come to life and form a unique capability that provides Circus Circus the opportunity to grow and earn above average returns. The company, under the leadership of management, has proven to be very innovative and have proven to be leaders in the gaming industry. Management's ability to control costs and raise enormous amounts of cash have contributed to Circus's Growth. The company has managed to raise over a billion dollars which was very beneficial in its expansion efforts.

A second resource is the ability to provide high quality service at a low cost. Rooms remain around $45 to $69 and had fairly high occupancy rates of around 90 percent. All of the properties have excellent buffets that make Circus Circus stand out above the others. The bundling of services provided by all of Circus's properties creates a competitive advantage that is valuable, rare, and costly to imitate. According to an industry study, customer service was ranked number one among consumers. Therefore, the ability to please the customer is vital to continued success in this industry. Recently occupancy rates have been declining, because of rapid development that has outpaced supply. This is putting a strain on the company to reduce costs of rooms to attract more customers. The problem is that when another hotel and casino open, the result is a drop in occupancy at another. Circus Circus and other competitor expansion efforts in the Las Vegas area are effectively cannibalizing their own properties.

A third resource is the current capacity of all the hotels and casinos under Circus Circus. The company has the ability to continue to meet demand for a long time. Circus Circus currently has nine properties in Nevada, one in Mississippi, and part ownership in three other locations. Furthermore, all of these properties are in very good condition and have undergone extensive remodeling and additions making them very valuable resources. The additional capacity that is expected to come online in the near future is also a key resource for future growth. Circus Circus is situated in a position for continued growth if it uses its knowledge of the industry to compete effectively. The Mississippi area is a rapidly expanding market that could be taken advantage of giving proper planning.

Circus Circus is in a strong financial position. Having adequate cash flow and the ability to secure large loans for growth. The debt to equity ratio has remained fairly consistent, although it has increased slightly in 1998, because of construction costs. The company has continued to show rapid growth in revenues and income as shown in [exhibit 6]. Circus Circus ranks 5th in terms of total revenue in the industry and the company continues to have a strong operating profit margin. The company has managed to maintain a good financial position; despite the huge expenditures the company spent on new projects and development. This ability is critical to the company, because in order to grow the company needs to be able to control costs and raise money. [1998 Annual Report] Strategic Recommendation Given the current state of the industry a differentiation strategy is the best possible recommendation for Circus Circus. The rise in new regulations and the increasing negative views towards gambling makes it necessary to form ways to protect the company while still reaching out to new markets. Furthermore, there is little growth potential in the current markets and over saturation is becoming a real problem. One of Circus's core competencies is its ability to develop original, high quality, and fun resorts that draw families from all around for entertainment. It is this ability that will contribute to the companies continued success and viability. By focusing on creating an entertainment resort and removing the casino from the resort, Circus could move into any state without considering any gambling restrictions. This makes sense, because for the first time, the gaming segment of Circus Circus's operations was less than half of the total revenue indicating a decline in its overall importance to the company. In addition, this would remove much of the negative effects and concerns facing the gaming industry and would instead provide only the benefits of good clean fun and economic stimulus. This would also eliminate part of the competitive stress because the company would be appealing to a wider range of people. The company has the ability to raise the cash by offering stock, obtaining debt financing, or through other internal means. The company has the managerial know-how to make this a profitable venture. In addition, it is important to continue to differentiate the companies' current services in all of its casino resorts and provide the best customer service possible. After all, customer service is the most important consideration in the gaming industry, followed second by theme or entertainment. Overall this recommendation would expand the geographic reach of the company, allow for expansion into new markets, securing new customers, and higher revenues.

To satisfy the desire to maintain growth in the gaming industry, Mississippi presents the best opportunity for this. It is expected that the revenues will grow by 58 percent by 2002. Currently there is insufficient capacity in the Mississippi to fulfill demand, therefore it is very important to expand quickly to create a foothold and develop loyalty and discourage further expansion by competitors. Another opportunity is to expand into Atlantic City. Currently, Trump Hotel and Casino has the largest market share in the city and the company is currently looking to sell and get out of the industry. This would be a good opportunity to try to acquire some of these properties if the price is right and hopefully gain a commanding share of the Atlantic City market. This could potentially increase the competitive strength of the company.

The current over-capacity in areas such as Las Vegas should be left alone. It is likely that in time demand will eventually catch up with supply and Circus Circus would be in the situation to jump on the increased demand. To accomplish this the company needs to continue its policy of service excellence and continued development of its entertainment and properties.

To deal with the threat of Internet gambling, Circus Circus should keep a watchful eye, but do nothing for now. It is under intense review and regulation. Lawmakers do not know how to handle the Internet gambling and it might be too risky to get into. Furthermore, any entry into Internet market could reduce the number of people who come to the casinos. It is also likely that this form of gambling is only a temporary fascination, because of the relative novelty of it. Currently, management lacks the skills necessary to develop this new technology and it does not make sense to acquire the personnel capable of setting it up. It makes more sense to continue as planned, doing what the current management knows best, the entertainment resort industry.