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October 1, 2014

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Nongaming revenue a shaky leg for Strip to stand on

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Leila Navidi

A private terrace of a Cosmopolitan guest room offers a view of the Bellagio Fountains and other properties along The Strip.

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Nongambling attractions fueled Las Vegas’ rapid rise as a world-class resort and convention destination but are proving to be a double-edged sword in the Great Recession.

Business experts are cheering the latest increases in visitor volume, gambling revenue, convention attendance and even automobile traffic into Las Vegas. However, they also caution that a big part of the Las Vegas recovery story is tied to nongambling spending — an often overlooked indicator.

And although those figures appear to be rising as the economy improves, the gap between what visitors spent before and during the recession on nongambling attractions is much larger than it is for gambling, which depends less on the economy’s health, experts say.

The Strip’s reliance on nongambling revenue — which accounted for 61 percent of all revenue generated by Strip casinos in 2009 versus only 42 percent in 1990 — will likely make for a slow recovery in the years ahead, they say.

“It’s going to take more than gaming revenue coming back. It’s got to happen on the other side of the equation, too, and that’s not coming back anytime soon. People’s spending habits have changed for the foreseeable future,” said Gerald Gordon, a Las Vegas bankruptcy attorney who has been involved in most of the region’s Chapter 11 cases involving casinos.

Years ago, casinos broke even on nongambling amenities such as restaurants and shows, or operated them at a loss. For the past couple of decades, Strip amenities were built or upgraded to make money.

In the run-up to the recession, room rates, nightclub admissions and cocktail prices skyrocketed to meet demand for an unprecedented wave of luxury offerings.

During those go-go days, operators saw the biggest profit potential in luxury resorts rather than the middle market. Budget-seekers were long the primary customer base for Las Vegas after the early days when the mob catered to high rollers.

“The general consensus during (the boom years) was that the regional gaming providers would take care of the middle market and that we wanted the luxury customer whether they’re gamblers or not,” said John Restrepo, a Las Vegas economist and industry consultant. “We forgot that the middle market, Ma and Pa Kettle from Dubuque, was the basis of our business. I think there’s now this recognition that we can’t take for granted any market segment.”

Because of the continued need for new attractions to drive profit, the Strip — even with no new resorts on the horizon — will develop nongambling experiences to further diversify its offerings from other casino markets, Restrepo said.

But Strip watchers like Gordon say the nongambling business model is also partly to blame for the wave of bankruptcies and restructurings in Las Vegas.

Nongambling revenue on the Strip has plummeted more sharply than gambling in the downturn, disproportionately hurting Las Vegas more than other casino markets throughout the country.

Unfortunately for Las Vegas, casinos tapped cheap capital during the boom years based on overly bullish projections of what nongambling amenities, such as hotel rooms, could generate, Gordon said.

The upside from this growing revenue stream seemed infinite when times were good. And it’s a lot easier to increase profit by raising the price of a room or a steak by $5 than it is to manipulate odds on the gambling floor.

Gambling is similarly “priced” on the Strip in terms of odds, irrespective of the economy. With a few exceptions, published figures such as table limits have changed little in the downturn. And despite state figures showing that Nevada’s slot machines are somewhat tighter than they were several years ago, that’s largely a function of replacing old games with fancier slots that “hit” more often yet keep more wagers over the long haul. While casino operators often replace less profitable machines with ones that get played more and thus win more money for the casino, the “price” of a slot machine is less flexible than, say, that of a fancy cocktail.

Gordon says lofty pre-recession projections of nongambling revenue are so out of whack with today’s economy that they indicate poor judgment by some companies that took on large debts to fuel growth.

Area casino companies that filed Chapter 11 have reduced debts by 75 percent in bankruptcy, illustrating how badly the recession hurt the gaming industry. Those figures, he said, also reflect a new reality of diminished earnings.

To survive the downturn, Strip casinos are pricing hotel rooms low enough to draw visitors while maintaining relatively high prices for other amenities to support more expensive operations and the big loans that financed them.

Yet prices for many items besides hotel rooms on the Strip are still too high for many visitors, said I. Nelson Rose, an industry consultant and gaming law professor at Whittier Law School in California.

“Will there ever be as many people spending $16,000 for a leather jacket or $280 for a Cirque show? I would say, not as many. And that’s a real problem when gambling is not your primary source of income anymore.”

Rose blames the nation’s “jobless recovery” for the unwillingness to spend lavishly. Corporate profits are up along with the stock market, yet companies aren’t hiring and the employed remain insecure about their jobs, he said.

“People are buying those (miniature) bottles of booze at the gift shop rather than buying drinks. And when you reduce prices for rooms, you get people checking in with coolers of beer.”

Thus, the careful balancing act under way on the Strip: How to discount prices without going too far.

Hotels want to boost traffic without alienating the wealthier, more exclusive customers who began flocking to Las Vegas’ opulent resorts in recent years. And despite the rash of discounts, national advertising for Las Vegas is still careful not to discuss deals to avoid pigeonholing the Strip as a cheap vacation — and hopefully ease the process of raising prices as the economy recovers.

Las Vegas still has the “X” factor that attracts both Middle America and the rich and famous. But Strip resorts now have the tricky task of balancing the needs of the masses against the desires of that smaller, more coveted group of customers with more money to spend, said David Horne, president of VIP Travel Services, a New York agency with a wealthy clientele.

“People with a lot of money don’t want to see a bunch of schlock people in their hotel,” Horne said. “There’s got to be give and take.”

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  1. I like this article. It's a clean-cut analysis of the situation, and it shows that too much luxury obviously costs money. It's money that otherwise would have been spent on gaming, but now it's spent on non-gaming, as we see.
    It is impressive to see so many super quality gaming facilities next to each other, competing and fighting to survive. As a visitor, I see that there's gaming going on at every property at almost all times of the day. However, What we visitors see may be an illusion, as nobody really knows how many millions these big casinos need to win on every given day, just to reach the breaking point. is it 2 Million per day for the Cosmo? Or perhaps 4.2 Million Dollars per day? I don't know.

    It is clearly a message that 61% revenues from non-gaming and 39% revenues from gaming means that the customers are no longer willing to spend their money without getting a counter-value. A 3-day visitor perhaps wants to enjoy a show, have some good meals and then, to finish it up, do some gaming. And that's about it. Every sucker knows that losing 300 instead of 700 means 400 more in his pocket. That from these 400 more in the pockets a visitor can go to the Boulevard Mall and buy some t-shirts, boots and other stuff. I think that's how many today's visitors are calculating. Obviously, the greeedy corporations that built all these high end resorts must have been living in a dream world, thinking that there are daily thousands of super rich visitors flying into Vegas, spending 800 dollars per day on dining and for their room, and perhaps 2000-3000 per day for gaming. They should take another look at their business plan perhaps...

    I still see that there are enough hotels catering to the middle class rather than the high end clients and fortunately these hotels are offering nice rooms, too. And many of these hotels have also remodeled rooms that fully meet many people's demand.

    From Switzerland

  2. Like the poster Boris, I enjoyed this article and found it to contain a realistic analysis.
    Airline flight volume is also critical. Most airlines are offering fewer weekly flights to Las Vegas. That hurts, both by keeping the cost of a flight higher, and by reducing the number of visitors. Not known yet is the percentage of fliers who will not fly to Las Vegas because of the nasty choice of getting radiated by the full-body scanner or getting felt up by a creepy TSA agent.

  3. Vegas was built on gambling, then came corporate America , that thought they knew better. They wanted
    to make sure the whole family came, so they built the mega resorts we have today.
    Why not turn Vegas into a Disneyland, after all their business plan was working!

    Corporate America saw profit, by doing so. In their eyes they could get the family to spend their vacations in Vegas, mon would be happy, and dad would be happy gambling, their children would have plenty of things to do and they all could meet back in the room at the end of the day. Where mon would argue with dad about all the money he lost gambling for the day.

    Dad would smooth things over with the show tickets they gave him in comps, and the free meals he got from comps. Things started to change when the bigger resort were built, the casinos needed to make more money to pay for them, so they started to cut the comps, and the pay-outs! Food prices and show prices kept rising, and the comps went down hill. Mon and Dad still argue every time they came to Vegas, and now it was costing more money, it got to the point that mon and dad didn't stand a chance of winning anything with the tight slots or table games.

    Corporate America forgot that if the players won they would give it all back anyway, they would go back home and tell all their friends what a great time they had in Vegas baby! They still left broke, and they were winners in their own minds, they hit the jack pot, they never told their friends that they spent it all thought!

    Now along comes Jr. that for years heard his parents arguing every night, he was taught to have fun for nothing, and not to gamble. He now spends his time with ten of his friends in a room that cost next to nothing just to get him here, and they spend all their money on partying, hence all the night clubs, and pools geared to Jr..! Welcome to the new Vegas baby, the players they do have in the casinos are being run off by the tight slots, and bad table game management! When the player gets lucky and starts to win anything they start to give them a hard time, the dealers are rude, and the service now sucks.

    Corporate America took the fun out of gambling, because of greed, the house has the advantage, and they have forgotten that, and now try to intimidate players that start to win, thier slots are so tight that they squeak every time you push a button, you see nobody that has a smile on their face, you hear no machines that are paying out, and now everybody has casinos in their backyards at home, why on earth would they come to Vegas!

    Wake-up Corporate America before it's to late, and go back to treating players with respect, give them a fair shake for their money, or they will just stay at home and play in the Indian casinos that nobody is making any money off, they don't pay taxes, they have no overhead,so they don't sweat the money like Vegas now does, and some of them know how to treat players with respect!

  4. Here's something interesting: Three of four comments on this story so far are from people who do not live in Las Vegas.

    Everyone thinks they know Vegas -- even from a distance.

  5. here's my calculation:
    50 dollars per room on average
    3 dollar breakfast (seattle's best coffee)
    10 dollar lunch buffet
    45 dollar rental car
    5 dollars gasoline
    5 dollars tips (buffet and house keeping service)
    10 dollar late night dinner
    (100 dollars miscellaneous, if I wanted some action....)

    So my grand total is about 130 dollars per day, before gaming.
    My daily swings on gaming are between -500 and plus 1000 or so, but rather in the range between -250 and plus 250, so it's all within a reasonable range. If you know that there are coupons available that give you discounts on meals and room then you can have Vegas vacations at a fairly low rate. And if you know how to play the right games, then you can have a real shot at THEIR money.

    From Switzerland

  6. Everyone believes they know the "Numbers" of the industry that posts here.

    Facts prove that comps have not been cut in over 20 years and the "hold percentage" has not risen in the last 20 years.

    They have not tightened up the machines or stopped passing out free food.

    You can see the real numbers here: http://gaming.nv.gov/abstract_rpts.htm

    It is a lot of reading but if you are interested in "FACTS" they are there.

  7. @Reza: The comments from out of town are from people called customers. That makes them much more valuable than what we think they ought to think.

  8. My wife and I make it to town 2-3 times per year. My room is next to nothing. I like the high quality restaurants(not extravagant). The Cirque shows we've seen two and that's enough. However to be entertained, a lower cost lesser known show is just as good if not better than the high priced, top of the line entertainer. It's always nice to come to LV. If you do it right you can have a nice time for not very much money.

  9. lericgoodman

    I also think that what out-of-towners say has probably more value than what a north las vegas based local or a Summerlin home owner has to fill in. After all, it's us tourists that bring the money to Las Vegas, plus the gambling addicted locals (which of course are not exisiting, or are they?). There is no way to make big money from a person grinding out a living from a bottom feeder job and has 2 car payments plus a mortgage lease to fulfill.

    As a local, no doubt about it, you get more inside info about the real value you can get from the hotels. By knowing the right people (slot host, buffet manager, etc, just like mentioned above by "JustMe", you get more advantages than probably most tourist visiting Vegas. Plus you get the floating point multipliers, the maiers shipped into your house with free cash, etc. That's all stuff we tourists can only dream of. Nevertheless, the city can't survive without the tourists, and you need them to pay for all the glitz.
    It is just important to understand that not all incoming visitors ("tourist") are plain idiots. To the contrary, many of them are probably very successful businesmen to them an expensive 4 day stay at Bellagio or wherever is nothing but fun, no matter how much it costs. However, to them with well-running businesses, it is even more visible that tricks such as resort amenity fees or all the other ways to take out the tourists are not the way to go. The only logical response not to support 6-5 b-j, for instance, is not to play it. And if you like the cool babes dancing in these "party pits",you can still watch them without playing the nasty 6-5 thing. But then it's all money cut down from the 39 per cents the casinos now realized is just not quite enough to make the nut. Think about.

    From Switzerland

  10. I am happy to see that the non-gaming revenue is finally being acknowledged and is a subject and concept that is long overdue in being built upon even more. There is HUGE potential in this area without disrupting the gambling this wonderful city is built upon!

    Great article!

  11. I never maintained the opinions of visitors are not important, but I would never agree that they are more important than those who took the risk to own and operate the businesses. We provide service to visitors, but we are not servants to them. The risk taker knows more about the business than the Monday Morning Quarterbacks ever will. All they do is parse costs down to the penny of each and everything they spent money on (or imagine they might, if they ever come to Las Vegas). But they relating the opinions of but one relatively anonymous person.

    None of the experiences and complaints I read above are within the range of my experiences or those visitors whom I question in the course of my day. They are those of the author(s) alone. Las Vegas shouldn't concern itself too much with anonymous comments on the Internet.

  12. edandersonvt
    The casinos comp your room and your meal based on your play, as we all know. Sometimes they comp you upfront, knowning from your history that you will gamble anyway. First time visitors may book their room normally , then start to gamble at the property they're staying and getting their room comped and some or all meals comped on top of that, but then it's normally based on their action.

    this is probably no news to hardly anyone reading this.
    What is different from 20 years ago that's the way they calculate the comps. Before there was computerized player rating, it was pretty much in the pitboss' hands to decide who is going to be comped, and who isn't. Some casino employees had the power to comp people even without seing that they were actually eligible to it. There was a lot of abuse going on. Suites were given to friends and to people palm-greasing the pit boss and such. It was not only what a player you were, but also who you know and how much you were willing to donate. As we also know there was a lot of bs going on with these markers. Professional gamblers would take markers as loans from as many casinos they possibly could get and then simply use some of these markers to pay back other pending markers and keep the rest of the other markers on their discretion. This was possible as long as the casinos were not linked together.

    As for the comp system, the liberal comps were gone when the computerized player rating was invented. Today, a host has some limited "line of comping" even without knowing whether a player will actually gamble its share or not, but usually it goes pretty much by percentages.
    This said, it is clear that if you get comped, let's say 150 dollars per day, the casino take this as some sort of a "cash back" from your theoretical losses, based on your action. If you're playing on games that have 2 per cent house edge, then you should know that these 150 dollars represent perhaps 20 per cent of these 2 per cent house edge , which is your "cash back". Therefore, you are quite a player and then it's no surprise when you come out losing a few thousand dollars on each trip as this is only the simple math.
    Being comped is nice, but sometimes paying for your room without the need of playing 4 hours in the pit or slots is sometimes the cheaper way.

    From Switzerland

  13. Here's something interesting: Three of four comments on this story so far are from people who do not live in Las Vegas.

    Everyone thinks they know Vegas -- even from a distance.
    ****

    And three of four comments are from people who VISIT Vegas - that is what the article is about - bringing back the tourist, NOT for those who LIVE in Vegas!!

    Locals do know where to go on the "cheap" but tourists do not and Vegas relies on tourism.

    Put two and two together. READ AND UNDERSTAND, Reza, before you comment.

  14. We provide service to visitors, but we are not servants to them.

    ***

    Sorry, toots, but tourism, which is Vegas' bread and butter, is basically customer service. And in ANY customer service business, regardless if you sell tires or are a hair salon, you ARE or should be a servant to those customers. What if you went to Smiths or to Nordstrom's and the "Customer service" person decided he/she was NOT your servant and refused to help you or wait on you? All of Vegas is a servant, including YOU, to those who come and want to spend their money there and even the local customer service based businesses are "servants" to the locals' population. It doesn't sound "pretty" but that's the way it is if you want to STAY in business.

  15. Vegaslee, who are you kidding? Those are only some of the "facts." I wasted a lot of time looking at your "facts." Where does it show that a gambler wins less on 6:5 blackjack? Where does it show the real data on the payback on slot machines from year to year? It shows revenue, expenses, income, etc. Yes, even comps to some degree but not comps per bet wagered, comps to time, etc. What you have is data. Incomplete data. Show us the analysis you have done on these all-encompassing "facts." Yes, they are facts. but facts don't tell the whole story. So if 6:5 blackjack doesn't "hold" more than 3:2 please explain that to the rest of us. And give us a proof from your "facts" that slots still pay x percentage out per hundred dollar in. If you can't do those things with your all-inclusive "facts" then please don't use them to prove your point.

  16. a player wagering 25 a hand on 3:2 double deck black jack will probably lose at the same pace than losing a player wagering 10 dollars per hand on a 6:5 game.
    The only difference between 3:2 and 6/5 is that a player doesn't feel treated like a complete idiot when playing 3:2. his money will last longer, but in the end, he will lose it, whether he likes it, or not. It just takes more time.

    Greetings from Switzerland