Gamblers not expected to double down in economic downturn
In a town enthralled with its own mythology, Las Vegas would like to hold on to one myth in particular these days: Gambling is recession proof.
It’s conventional wisdom characteristic of a city and an industry far more accustomed to boom than bust, but it’s just not true, experts say. Gamblers, whether motivated by compulsion or hope, don’t necessarily double down when the economy spirals and belts tighten.
“It’s an old idea that has very little relevance and maybe no relevance to the United States today,” industry analyst Eugene Christiansen said.
Christiansen and others trace the notion to decades old economic research conducted when gamblers’ options in the U.S. were limited to horse racing and a handful of Nevada resorts. Such tight supply ensured demand for gambling was steady.
“They fared pretty well,” said William Eadington, a professor of economics and director for the University of Nevada, Reno Institute for the Study of Gambling and Commercial Gaming. “Part of this was a pent up supply of gaming product.”
Not so in 2008, when 48 states have some form of legal gambling and millions of Americans are within driving distance of a slot machine. Casino companies today have moved gambling to the mainstream of the U.S. tourism and entertainment industry and have moved themselves into the competition for consumers’ discretionary spending.
MGM Mirage chief financial officer Dan D’Arrigo said his company sees no difference between the way consumers manage their gambling dollars and the entertainment and lodging spending that has grown to make up the majority of casino companies’ revenue.
“They’re all in one bucket,” he said.
With the housing market tanking and gasoline and food prices rising, operators are seeing the effects of that bucket being emptier than it used to be. Still, gambling companies are going ahead with resorts that will add thousands of new rooms in Las Vegas.
A survey of 19 states with casino or race track gambling found about half saw gross gambling revenue drop in December 2007 from the year before. In January 2008, the portion grew to 12 of the 19 states, including Nevada. The state saw gambling revenue fall nearly 5 percent from a year ago to $1.06 billion, although analysts note it’s too soon to discern a clear downward pattern.
Harrah’s Entertainment Inc., the world’s largest gambling company by revenue, noted several soft patches in its fourth quarter earnings report.
Because companies have started to cut budgets for employee travel and conventions, booking cancellations have increased and attendance has dropped at major conventions, Harrah’s chief executive Gary Loveman said.
Room rates are “off a bit,” he said, and consumers who don’t use the company’s loyalty rewards card ” typically low-rollers ” have been the first to drop off.
MGM Mirage noted similar weak spots, despite reporting a revenue increase of 4 percent, which was aided by a rush of foreign investment. Dubai World, the investment arm of the Dubai government, completed a joint venture giving it a 50 percent stake in the $8.1 billion CityCenter megaresort on the Las Vegas Strip.
While the CityCenter development remains a bright spot on the horizon, other smaller projects face uncertain futures due to the shaky credit market. In January, the Cosmopolitan, a casino resort under construction on the Strip, defaulted on a $760 million construction loan from Deutsche Bank and appears to be moving toward foreclosure. Questions also have been raised about the future of The Plaza, a 3,500-room resort modeled on The Plaza Hotel in New York.
Atlantic City properties are more clearly feeling the pinch of increased competition from new Pennsylvania slot parlors and tight credit markets.
The city’s gambling halls suffered through a 10-month decline in revenue until a much welcomed 1.5 percent uptick in February. Pinnacle Entertainment recently announced it was considering scraping a $2 billion megacasino project if credit markets don’t improve.
Christiansen said such news has precedent. In 1991, when the U.S. was facing a similar mix of economic woes, the casino industry felt the blow. After outpacing increases in personal income for most of the 1980s, the growth in gross gambling revenue fell behind that year.
This time around experts and executives are talking about the industry’s resiliency, rather than immunity, to economic downturns.
“Historically, gaming has been extremely resilient, very durable and held up better than almost any other sector during recessions,” MGM Mirage president and chief operative officer Jim Murren said recently.
The industry, particularly in Las Vegas, pointed to several factors to bolster the claim.
Compared with other top U.S. tourist destinations, major gambling hubs ” Las Vegas and Atlantic City ” are still affordable to the bargain traveler.
D’Arrigo said MGM Mirage has seen an increase in comparison shopping for room rates with visitors opting for companies’ mid-market properties over high-end luxury resorts.
Meanwhile, the high-end resorts may increasingly fill up with international travelers, thanks to a U.S. dollar so weak that a Las Vegas Strip room at the tony Bellagio can seem like a bargain for tourists from Europe and Asia.
Roughly 13 percent of all visitors to Las Vegas are from outside the U.S. and that number is expected to rise.
But Eadington notes Las Vegas’ fortunes are often closely tied to the development of new properties that create buzz and draw repeat visitors. In the past, when gambling revenue in the city has bested economic growth it’s been in the wake of a building boom.
It’s too soon to know whether the first new resort hotel on the Strip in three years, Las Vegas Sands’ $1.9 billion Palazzo which began opening in late December, will be that sort of driver.
Early signs don’t look promising. The number of visitors to Las Vegas fell slightly in January compared with year-ago numbers. Daily drive-in traffic has slowed compared with last winter, according to the Las Vegas Convention and Visitors Authority.
Many analysts are looking further down the road to the late 2009 opening of the CityCenter project and its 6,300-rooms for the rebound.
“There are a lot of arguments that this should be a softer market in ’08 that it was in ’07,” Eadington said.
Robbie Hamilton, a regular at the Hooters and Orleans hotel-casinos, makes one such argument. The 27-year-old student at the University of Nevada, Las Vegas typically spends at least $40 a week betting on games, but he expects that amount to fall as gas prices rise.
“Gas and gambling kind of come out of the same pocket,” he said. “I’ll have to have less action because my gas tank needs it.”
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