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Sin City Meets the Low Rollers

15 minute read
Bill Saporito / Las Vegas

It looks to be a reasonably busy weekday evening at the Wynn Resort on the Las Vegas Strip. Asian tourists stop in its beautiful atrium entrance to have their photos taken among the flower sculptures and trees that mark its opulence. On the casino floor there’s a gang of Google conventioneers surrounding a craps table, enthusiastically conducting a search for a seven. Yet the high-stakes baccarat and slot rooms are largely empty, and dealers stand as still as the topiary behind vacant $100-minimum tables. At the other end of the risk scale, the Wynn’s table minimums have drifted down to $10 or $15. Still too much for you? Everywhere in Las Vegas there are slot machines that allow you to plunk down a penny a spin. Go ahead, let it ride.

Or don’t. Four years after the end of the Great Recession, tourists have returned to Vegas in full force–but they are more apt to let it ride on a roller coaster than on a roulette wheel. The Las Vegas Convention and Visitors Authority clocked in 39.7 million visitors last year, eclipsing the 2007 record. Last year’s gross gambling revenue in Clark County, Nevada, which includes Las Vegas, totaled $9.4 billion. That’s a lot of wagering, but it’s about 13% less than the $10.6 billion bet in 2006–by a like number of visitors. While the rest of the economy is back to even–and autos and housing are going flat out–Vegas is still down a billion and change. “In pure economic terms, it’s a fair argument to say there’s been a shift in the demand curve of gambling activity,” says Jeremy Aguero, a consultant with Applied Analysis and a board member at Nevada State Bank.

Five years ago, when the economy caved in, consumers naturally pulled back their willingness to risk, which is a particular problem for a city that thrives on the optimism of a blackjack player hitting on 16. The big question for Vegas is whether this risk aversion is an extended hangover–in a city well known for them–from the financial meltdown or a more permanent feature of the new normal. Since gambling represents the biggest chunk of revenue and profit for casino owners, “its recovery is crucial for the recovery of the Strip,” according to a recent report by Moody’s. The analysts don’t see that happening for at least another year. The most recent quarterly earnings reports from Caesars Entertainment and Wynn Resorts, which both failed to meet expectations, reflect the difficulty of getting people to gamble like it’s 2006.

Las Vegas’ situation might now be raising a broader economic issue. If we can’t let loose with money there, does it mean that a nation raised on risk–from gold-seeking Forty-Niners to Texas wildcatters to Wall Street arbitrageurs–has lost its appetite? Banks have been criticized for refusing to let go of the money. Corporations have trillions of dollars sitting on balance sheets because they’re wary of taking on too big an investment risk. Tourists, too, seem to be having a hard time letting go.

“My theory is that when people had a ton of money in their portfolio, they felt like geniuses,” says Professor David Schwartz, head of the Center for Gaming Research at the University of Nevada at Las Vegas. “I wake up every morning and I’m richer, a lucky person and a good gambler.” It’s not all theory. Every dollar of added value in your home or investment portfolio triggers a few cents of new spending a few months down the road–what economists call the wealth effect. While 91% of the total household wealth lost during the crisis has been recovered, according to the St. Louis Federal Reserve, that recovery has been uneven: the richest households, more heavily invested in stocks, lost the most and regained the most. Adjusting for inflation and population growth, the average household has recovered only about 45% of its wealth–which doesn’t help spending or risk taking.

Consumer caution is one of the reasons the economy has been stuck in slow-growth mode, with GDP increasing just 1.7% in the most recent quarter. You can see that caution in consumer spending, which is grudging. You can see it in consumer saving too. Mutual-fund investors pulled billions of dollars out of equities for four years running until early this year, missing a huge jackpot as the market reached record levels. Stocks compensate for risk better than roulette tables do, so if scarred consumers are unwilling to invest in Wall Street, it’s not necessarily surprising that when they come to Vegas, they are betting less, playing different games–or not playing at all. “If you were to ask me if I gambled more or less, I’d say I probably gambled less than last year,” says Steven Scheft, after a recent eight-day visit that passed with only an occasional stop at the blackjack or craps table.

Passing Up the Tables

This is probably not what Steve Wynn had in mind when he spent $5 billion on the lavishly appointed Wynn and Encore properties. In early May, Wynn, the CEO of Wynn Resorts, ambled out of a closed-door session with Nevada’s legislators and was asked by a local reporter what wisdom he had for the Silver State solons. “Right now the gambling industry has a serious health problem,” he reported. For instance, table games such as baccarat, blackjack and craps used to represent 80% to 90% of the casinos’ revenue and earnings. Since the meltdown, the casinos have become ever more reliant on slots, where the “hold” (the percentage of bets the house keeps) has been dwindling. Slots now represent 50% to 60% of revenue and 75% of gross profit, says Dean M. Macomber, an industry consultant and former gambling executive.

The financial meltdown caught Vegas at a particularly vulnerable time. In 2007 and 2008, while industries from autos to real estate to airlines were shedding capacity, this town was doubling down. More than $15 billion of new properties opened as the bottom dropped out, capping an investment bubble in a city that increased its room count from 133,000 to 150,000. You didn’t need to be an economist to see trouble ahead, but the CEO of Caesars, Gary Loveman, happens to be one. He left a professorship at Harvard to render unto Caesars. “The local market experienced an astonishing supply accretion,” he told Time. “The fact that we held on is absolutely stunning. We’ve had to work really hard.” If not for their prudent investments in Macau–which produced $38 billion in gambling revenue last year, dwarfing the take in Vegas–companies such as Wynn and the Las Vegas Sands would be in serious difficulty.

Across the country, gambling is reaching a saturation point as states that were late to the party, including New York, Kansas, Maryland and Maine, licensed more facilities in an effort to increase tax revenue. More than 70% of U.S. gambling revenue is generated outside Nevada. Ohio became the 23rd state to join the party, opening four casinos since 2012. Massachusetts is next. Nationally, gambling revenue rose 4.8% last year to $37.34 billion, according to the American Gaming Association–still below 2006 levels. But seven states suffered revenue decreases as play was distributed among more casinos.

Although Las Vegas is a shameless city, it got caught with its paradigm pants down. The segment of tourist dollars spent on gambling, now less than 50% of the total, has been declining for years as the town continues to open more celebrity-chef restaurants, Cirque du Soleil shows, high-rise amusement rides and nightclubs. Diversification has long been part of the city’s strategic plan, and that has helped Las Vegas retain its status as one of the country’s top tourist and meeting destinations.

The newest entertainment twist now is day clubs, like the Bare Pool Lounge at the Mirage (“where women are free to frolic topless”) or Liquid at Aria, where celebrity DJs like E-Rock gather half-naked 20-somethings at poolside parties to swing the afternoon away until the night shift commences at such ultra-hot clubs as Tryst at the Wynn that buzz until the next pool opens. This younger crowd views gambling more as a sporting diversion, not something to take seriously or do for very long.

There’s no way, though, that millennials swilling overpriced designer vodka can match the profit of a $25 blackjack table that hands out free booze. A 5,000-room casino hotel that runs 24/7 has high operating costs, and it’s the gambling action that has covered them. The magic of a casino hotel is that once the costs are covered, profit mounts prodigiously–in accounting jargon, this is a business with very high operating leverage.

To make things worse, lower gambling revenue has coincided with lower room rates. Vegas rooms are priced on the cruise-ship model–reduce prices until the vessel is full. The average daily room rate in 2012, $108.08 according to the Las Vegas Convention and Visitors Authority, was 18% lower than five years earlier–a consequence of adding 13% more rooms during a recession. This place is an insane value: you can get a room for $150 a night that would cost three or four or five times as much in other major cities. This has led to another problem: budget-minded travelers piling into cheap rooms in five-star hotels without making a donation in the casino. They arrive with cases of beer in tow. The hoteliers loathe them.

It’s certainly a lot easier for consumers to adjust their spending than it is for casinos, with their expensive fixed assets. Says Keith Smith, CEO of Boyd Gaming and a member of the San Francisco Federal Reserve Board: “We had not seen this in our business model: visitation dropped, spending dropped significantly more. For the first time in my career we experienced negative operating leverage.” When variable costs can’t be cut any further, your losses multiply the longer you are open. A forensic analysis by Macomber for the University of Nevada at Las Vegas found that daily gambling revenue per occupied room dropped 14% from 2007 to 2012. Meanwhile, the total cost of running these entertainment engines rose 32% in the same period. Bottom line: a $5.2 billion swing, from a profit of $3.6 billion in 2007 to a $1.6 billion aggregate loss by 2011. “Not pretty,” Macomber says.

The irony is that Las Vegas has never been more popular as a destination. “When you attract 40 million people, you’ve got to extract something from them,” notes Aguero. “But they are not coming here to gamble. They are coming here to see Las Vegas.” That would include people like Fran DiLeonardo from the New York area, a typical visitor who spent a few token dollars in the slots and moved on. “I’d rather buy something than gamble,” she says. “I want to walk away with something.”

Getting Religion on Costs

Since the Meltdown, Casino operators such as Boyd and Caesars have been doing everything they can to get more efficient. Boyd employs more automation in restaurant booking and centralized room reservations, for instance. And it uses its mobile platform, B Connected, to make targeted offers to customers most likely to accept. Caesars, too, has put technology to work to develop sophisticated modeling programs to predict demand and thus lower the costs of providing service. It began offering higher-value discounts–a single admission price that lets you into every one of its shows, for example–to keep visitors on the property.

These moves have paid off as the tourists have returned–with one shortfall. “Food and beverage has come back, shows have come back,” says Smith, whose company runs off-strip casinos such as Sam’s Town and Orleans that are popular with the locals, about 20% of the total Las Vegas market. “Gaming hasn’t.” The locals are gambling shy too, and who could blame them? They were crushed in the real estate collapse in two ways: most mortgages are still underwater, and 2 out of 3 construction jobs disappeared. Today, locals are just as likely to head to a restaurant as a poker room. That’s not as much of a problem for Boyd, whose less-pricey properties, which include everything from bowling alleys to sports bars, aren’t as gambling-dependent as destinations on the Strip are. “We don’t care where they spend their money,” says Smith, “as long as it’s with us.”

In the higher-end casinos like Caesars, says Loveman, the house used to thrive when highly liquid business types–a car dealer from Southern California, say–spent freely. “That player is still with us,” he says. “But one of the unique features of our business is that he can spend considerably less and get the same [thrill].” In 2007 that player might have bet $50 a hand; now he’s betting $40 a hand. “We don’t know if it’s a new normal,” Loveman says.

That’s not been particularly helpful to Loveman as he tries to maneuver around the company’s $21 billion in debt, most of it tied to what turned out to be an incredibly ill-timed leveraged buyout in 2007. Making that debt disappear would be the best magic trick in town. Others have fared far worse. The Riviera went bankrupt (for the third time), as did the LVH, once the Las Vegas Hilton. Projects like the Fontainebleau are frozen on the drawing board. Smith stopped building Boyd’s proposed Echelon hotel on the Strip midconstruction in 2008 and recently sold the site to Genting, a Malaysian gambling company, for $350 million. Analysts say the price of real estate on the Las Vegas Strip dropped an astonishing 90% from peak to trough. (Current price: about $4 million per acre.)

Consider the predicament of the Cosmopolitan, a boutique hotel (which in Vegas means 3,000 rooms) loaded with chandeliers, oversize sculptures, giant LED screens, vending machines that sell art and 13 restaurants. The hotel was built for a ridiculous $1.3 million a door. That’s 2006 thinking at work, because it implies a $1,300 daily rate at a conventional hotel. With weekday room rates in 2013 under $200, the Cosmopolitan can’t possibly earn that investment back on hotel revenue, nor did it plan to. But the young, rich crowd it attracts seems way more interested in its Marquee club than its casino. The hip hotel lost $125 million in its latest two quarters.

Of course, Las Vegas has a knack of figuring its way out of trouble. When its family-friendly strategy faltered in the 1990s, the city transitioned nicely to naughty. Today, the once decrepit downtown district along Fremont Street is being reborn as a cozier place where the scale is smaller and the vibe hipper. It presages a city that’s less tourism-dependent, if only it can attract industries beyond tourism.

At Boyd Gaming, Smith has spread his bets, buying casinos in other states and making a deal with the European company Bwin for an Internet-gambling platform for New Jersey, which has legalized that form of betting. Smith figures that New Jersey, with 9 million people, can produce $1 billion in Internet-gambling revenue. The industry has pushed Nevada to get with the program, and it recently legalized in-state online poker. “For the younger generation of customers, who participate in our product differently, it’s a natural extension and not competitive to what we do,” says Smith. Imagine those kids sitting around the pool with gambling apps on their mobile devices rather than social-gaming apps.

At Caesars, Loveman is working on both fronts. The company is developing the Linq, a project that it calls an open-air retail, dining and entertainment district, which includes a 550-ft.-tall Ferris wheel, the High Roller. The Linq has no casino space. “I’m trying to pull customers out of our competitors’ casinos,” Loveman said during the company’s recent earnings call. “Linq is a sound investment in a favorable location with a very unique offering.” Caesars is also creating a new firm to attract investors to its online-gambling company, which operates social-gaming platforms and betting games in Europe. He will take it wherever Internet wagering becomes legal.

And despite the carnage of the past five years, the city is once again trying to build its way out of trouble. There are new casino projects in the works, including Genting’s 3,500-room Resorts World, which will open in 2016 and could increase the flow of Asian gamblers that Las Vegas craves. MGM is building a sports arena, and renovation projects at a number of hotels are ramping up construction jobs. Until 2016 there won’t be many net room additions, which should allow operators to raise rates and take some pressure off operating costs.

But for the biggest players, there’s still no getting around gambling. You can’t run a five-star hotel with three-star gamblers. “Has Las Vegas met a headwind that it can’t overcome?” asks Macomber, who has lived here for 40 years. “How much more of America will come, and how much will they be able to spend?” Happily, the sports book can give you odds.

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