As Strip scales up, some say goodbye

By Liz Benston

Friday, Aug. 8, 2008 | 2 a.m.

Trey Rusk used to travel to Las Vegas four times a year to play the slots. That was until about two years ago, when he and his wife decided that the city was no longer their kind of scene.

The realization came one night at the Rio, when Rusk couldn’t find a waitress and had to navigate a throng of scantily clad clubgoers to get a Bud Light. After seeing Rusk’s player’s card, the barman charged him $5 for the beer.

“We left the next day and we haven’t come back to Las Vegas since,” said Rusk, 53, a police officer from Houston, Texas.

The Rusks now travel to Laughlin, Reno and Lake Tahoe.

“They cater to gamblers in our age group,” he said. “When we get off the bus from the airport, they meet us and hand us a coupon book. And, if you ask, they will usually give you a comp.”

Hundreds of tourists have similar stories about how they have soured on Las Vegas. And it’s not just about the money. Many are middle-aged people who aren’t comfortable in the ultra-hip nightclubs, lounges and restaurants that appeal to younger, style-conscious consumers.

Rather than cheering the slew of upscale resorts including CityCenter, Fontainebleau and the Cosmopolitan now under construction, these tourists-turned-critics bemoan a future without comped buffets and $9.99 prime rib.

With consumers pinched by the mortgage crisis and higher fuel prices, many visitors are wondering whether the Strip’s rapid transformation into a playground for spendthrift hipsters was a smart idea. Some are taking pleasure in the recent decline in profits on the Strip, saying resorts, having abandoned middle-class gamblers, are suffering a backlash after greedily inflating prices on rooms, food and drink.

But the developers who decided to go upscale didn’t do it to spurn middle-class gamblers. It came down to simple math.

With land on the Strip going for more than $20 million per acre, developers are forced to build the kind of properties that can charge $300 for a room and $100 for dinner to make a profit, analysts say.

There’s enough consumer demand to warrant building midlevel casinos for middle-class customers, said Bill Lerner, a stock analyst with Deutsche Bank. But the numbers don’t pencil out — even though some developers, given the choice, would probably choose to cater to the mass market.

“It’s a math problem,” Lerner said.

Not that luxury properties mean easy money. Profits are harder for everyone to come by these days and will be more difficult for the resorts under construction — the most expensive, and perhaps the most opulent, in Las Vegas history.

So far, the strategy appears to be working. MGM Mirage reported this week that its high-end resorts are holding up better during the downturn than the company’s low-end properties.

Although Strip casinos are maintaining high profit margins during the downturn — 30 percent or more for some companies — they aren’t making as much after the total cost of the project is factored in. Returns on invested capital, which includes land and development costs, are much lower than they were in the 1990s. For most of that decade, returns were in the 20 percent to 30 percent range. Today, casinos are lucky to earn 15 percent returns. And such returns are now unrealistic in light of the new resorts that will open in 2010 and 2011, Deutsche Bank says, which is forecasting returns closer to 12 percent.

These are abstract figures for folks like the Rusks, who grew accustomed to frequent comps in Las Vegas until they were told that their level of play didn’t warrant them.

An easier way to think about this is that the Strip, because of rampant land speculation in recent years, has become like New York’s Fifth Avenue. No developer would build a JCPenney on Fifth Avenue, where there are instead Gucci and Prada boutiques.

Same with Strip casinos, which have to be creative to earn their 12 percent. Resorts are selling penthouse condos for more than $1,000 per square foot — money that helps finance the projects but is beyond the reach of the fanny-pack crowd. To lure the big spenders, restaurants and bars can’t just look nice. They must be crafted by name-brand designers and feature menus by culinary stars.

The more upscale the product, the higher the profit margin.

Age plays into the equation as well. Even casino executives have been surprised by the willingness of customers, especially those in their 20s, to spend exorbitant amounts on meals and drinks.

MGM Mirage, the Strip’s largest operator, is pumping hundreds of millions into some of its older casinos, such as the Luxor, to make them more competitive (read: upscale and fashionable). A similar transformation at the Mirage significantly boosted the company’s profits there.

(The company says it’s not abandoning longtime, mid-roller gamblers and recently discussed upgrading its loyalty card program to offer more perks. Whether the Rusks would qualify is an open question.)

Dennis Gomes, a casino executive who used to run the Tropicana casinos in Atlantic City and Las Vegas, says the business now demands fewer comps and more expensive venues.

“You can’t give away as much as you used to. That’s a business model that doesn’t work anymore,” Gomes said. “It’s not only more expensive for customers, it’s more expensive for developers. The cost of entry is too expensive.”

So the transformation will continue, even during the economic downturn. The luxury gap between Las Vegas and other destinations that compete with the city, such as San Diego and Orlando, will grow. And cruise lines will continue to pick up the midmarket business that Las Vegas began losing even before the decline.

There might be a silver lining for budget-conscious tourists.

While luxury properties duke it out for customers, the few remaining midmarket properties on the Strip will find it’s advantageous to maintain a niche catering to the middle class, Lerner said. Harrah’s Entertainment, which owns several mid-roller properties near the center Strip, could profit by maintaining its casinos rather than tearing them down and going the way of Fifth Avenue, he said.

“There’s a piece of business that’s being missed that doesn’t want to pay $300 a night for a room.”

And, the Rusk family hasn’t entirely abandoned Las Vegas. The couple’s daughter likes coming here. She thinks the night clubs are cool. And she probably wouldn’t mind paying $5 for a beer.