Las Vegas Gambling: Looking ahead to 2010, beyond

Dec 29, 2009 5:03 PM

Recovery not yet on the horizon

Entering a new year is often a time for hope and expectation, seasoned with optimism and the determination to improve on the events of the ending year.

But the gaming industry in 2010 will continue to face the economic challenges it endured over the past year, the result of the worst recession in 80 years.

Most experts believe there’s a recovery on the horizon, but that it’s just not yet in sight.

Bond rating agency Fitch Ratings reports that the economy hasn’t even bottomed out yet, that national unemployment won’t peak until the second quarter of 2010; and that unemployment will remain high through 2011.

For Las Vegas casinos, that translates to another 3 percent to 5 percent of declining Strip revenues next year, even though Las Vegas visitation will post modest increases of up to 5 percent, according to Fitch’s gaming outlook published last week.

"Profitability will remain under pressure as operators will be aggressive on pricing and marketing through 2010, as new capacity needs to be filled, corporate travel budgets remain under pressure and consumer spending patterns improve only modestly," the Fitch report stated.

Fitch’s senior director Michael Paladino predicted that a Las Vegas recovery is "going to be a slow recovery the next few years."

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Fitch’s estimates are actually rosier than other analysts. Deutsche Bank bond analyst Andrew Zarnett has predicted a 10 percent decline in Strip casino revenues for 2010, along with a 20 percent slide in cash flow.

Compounding the problem has been the sudden increase in available Las Vegas hotel rooms.

"The economy is going to continue to be weak next year and … with all the new rooms there will continue to be pressure on room rates," said Dennis Forst, a gaming stock analyst with KeyBanc Capital Markets.

Currently, there are more than 145,000 hotel rooms in Las Vegas, including the new rooms recently opened at MGM MIRAGE's (MGM) CityCenter, Planet Hollywood and the Hard Rock. But total visitor volume to Las Vegas is projected to be only 36.4 million people in 2009, about the same number who came here in 2004, when there were only 131,000 hotel rooms.

The resulting glut of rooms has caused the hotel occupancy rate to plummet from a high of 94 percent in 2007 to about 86.7 percent, currently.

The aforementioned CityCenter and its magnificent ARIA Resort & Casino is expected to help drive tourism in 2010, but some analysts are skeptical that it can cause an immediate and noticeable upswing in Vegas tourism.

"CityCenter bears unique amenity offerings that should drive trial and long-term growth," said analyst David Katz of Oppenheimer & Company. "Visitation should rise on the Strip in 2010, although cannibalization of wholly owned properties by CityCenter could offset a rebound (in) … somewhat of a zero-sum game."

Beyond the effects of the economic recession, the advent of expanded competition from casinos throughout the country could mean a total recovery – that is, a return to 2007 revenues – may never occur, according to some experts.

The American Gaming Association reports that about one-quarter of the U.S. adult population, or 54.6 million people, visited a casino in 2008.

That percentage is virtually the same as it was in 2005, when 52.8 million adults or 25 percent of the population, visited a casino.

But the number of casinos in the country increased from 455 in 2005 to 504 in 2008, effectively providing more casinos from which to choose from. (Those numbers don’t include the 400-plus Indian Gaming properties in the U.S.)

Some analysts believe expanding supply of casinos has had its effect on Las Vegas visitation: With more than 800 casinos throughout the country, potential Las Vegas customers may be less willing or less capable – because of increased travel costs – to make the trip to Nevada, when there are comparable casinos in their own region.

Many of these regional casinos now offer amenities similar to those in Las Vegas; which could have taken some of the "uniqueness" out of the Strip resorts.

That might be a reason why the number of first time visitors to Las Vegas has slipped in recent years.

Last year (2008), only 16 percent of Las Vegas visitors were first-time visitors, the lowest level ever (down from 19 percent in 2004 and 26 percent in 1999).

Marketing experts say the city and its mega-resorts need to become more innovative in their offerings – beyond the high-end restaurants, shopping, shows and other non-gaming amenities – in order to take the industry into exciting new directions and create new opportunities to drive tourism.

Others have suggested that the state lower its gambling age to 18, which is not unprecedented, as some casinos throughout the country allow 18 year-olds to gamble.

"When you look at all the new electronic games, which are designed to attract a younger customer base, you would expect they would appeal to players in that age group," said a casino floor supervisor at a Las Vegas casino who asked that her name be withheld. "Virtually everything else – the shows and nightclubs, for instance – are geared toward younger customers; why not gaming?"

Indeed, the potential market could be significant. If the 25 percent level of adults who visit casinos remains constant for the 18-21 year-olds, that could open up a population of 12- to 15 million more casino players.

An influx of 15 million customers certainly couldn’t hurt the industry’s recovery.

Question? Comment? E-mail me at: David Stratton