Is Diversification A Good Idea?

Diversification is being touted by analysts and financial institutions as the long-term solution to gaming’s problems. It might be, but then it might not be the solution. In today’s challenged gaming economy, casinos are diligently looking for ways to improve their performance. There are two opposing views on the subject; one says to diversify by add more amenities and charge more for the existing ones; the other calls for a return to the basics by focusing on the gambling and customer service. It is an ongoing debate and each side has its adherents. The diversity crowd is fond of pointing to Las Vegas as the perfect model and indeed Las Vegas has been successful by expanding its product offerings.

A recent survey conducted in Las Vegas concluded that only 12 percent of the visitors coming to town are there just to gamble. The Las Vegas Visitor and Convention Authority does a visitor survey every year This year it reveals what industry observers have known for a long time – Vegas is much more than a place to gamble. Forty-one million people visited Las Vegas in 2014 and more are expected in 2015. On average they come in couples, make over $40,000 a year and spend a couple of hundred dollars on food and drinks, another hundred and something shopping and they set aside $500 each to gamble. Only, eight percent of the city’s visitors come for a convention or to wed, still that is over 3 million people. The percentage of people under 30 years old going to Vegas is increasing significantly. It was 17 percent in this survey, nearly 7 million and that is up from 10 percent a few years ago. That is all good news; on the downside, 29 percent did not gamble at all and that percentage has grown every year.

The Las Vegas Convention and Visitors Authority says it has a pretty good idea who visited the destination last year: 45-year-old married people making $40,000 or more, with one-third of them coming from neighboring California. They came in pairs and left the kids — if any — at home, spending $281.88 on food and drinks, $149.77 to shop and budgeting $530.11 each to gamble, more than they have in the past five years. They stuck largely to the Strip, opting not to venture to downtown Fremont Street’s casinos. They had little interest in comedy shows. But if they had side-trips in mind, plenty planned to see the Grand Canyon up close during their visit. All in all, 96 percent said they had a good time. Kimberly Pierceall, Associated Press, 4-15-15

Las Vegas is the envy of every gaming destination on the planet and not because it has the most gaming revenue. The envy comes because Las Vegas has become more than a place to gamble. Eighty-eight percent of the people who come to Las Vegas have another reason for coming to town. They come to shop, eat, dance and see the sights. But even with all of the other activity, each couple brings over five hundred dollars to gamble. All the attractions combined were enough to bring 41 million people to Vegas last year.

The resorts in Las Vegas have spent billions and billions of dollars in the last 25 years to become more than casinos. Judging by their financial statements, they have been successful. Steve Wynn is fond of telling audiences that his Strip properties have always done more non-gaming than gaming revenue. The attempt by Strip casinos to broaden their revenue base began in the early 1980s when accountants assumed major roles in publicly traded gaming corporations. They were leery of the ups and downs of the win of table games; they wanted a more stable and predictable revenue and thus the trend started. Among the traditionalists in gaming, the trend always had its critics, but the financial community loved it.

Thirty years later, the trend is a fact, at least in Las Vegas. However, it has not been easy to accomplish the same feat in the rest of the country. Other jurisdictions have tried, most notably Atlantic City. There are two reasons for the failure. First because there have never been enough casinos in other jurisdictions to create the critical mass. It is the total sum of all the casinos that makes the Las Vegas Strip, not any single casino. All of those casinos each with different restaurants, retail and entertainment mean there is something for everyone regardless of age, income or tastes. The second reason is financial; casino/resorts in other jurisdiction do not have the same access to capital as resorts in Vegas because they do not have the cash flow. The resorts in Las Vegas have invested billions of dollars, that level of investment in other jurisdictions would never produce an acceptable return on the investment.

The Las Vegas Strip model appeals to many analysts, bankers and investors. One analyst even said the failure of the nation’s regional markets to replicate the model is at the root of the casino struggle in those markets.

A casino industry analyst is offering a bleak outlook, seeing demographic and industry problems weighing on casinos struggling to draw visitors and increase revenue. Keith Foley, an analyst at Moody’s Investors Service, wrote that economic growth will slow as the population of older Americans outpaces younger generations…Casino business has not kept up with the improving economy since the end of the recession in June 2009 as consumers limit spending…He says an oversupply of casinos and gambling enterprises that are chasing the same consumer dollars also are damaging prospects for the industry’s financial strength. Associated Press, 4-16-15

The story is correct in its assessment of the regional markets’ problem. They have not bounced back from the Great Recession. Steve Wynn goes farther; he does not think the economy has bounced back. In his latest earnings call, Wynn said the economic recovery has been “grossly overstated.” Whether or not there has been a full recovery, people are spending their money differently now than they did before 2007. One of the differences is gambling; casinos have dropped down the priority list of most consumers. There is general agreement on that fact, but little agreement on the cause. Some people blame the economy, some blame the lack of diversification by casinos and others blame the casinos themselves.

Boy do I disagree with the Analyst: Demographic, industry problems weigh on casinos. And to suggest that local casinos which have not jumped on the “retail” bandwagon to attract players are making a mistake is even more disagreeable. Strip casinos created their own monster and now are blaming their customers for their problems. Casinos are the ones that cut labor to the bone, raised hold percentages, cut club benefits/comps, bought games that are more volatile. Tried to sell 6 to 5 Blackjack as a good thing and created palaces to the owners – not for the players. Sure – having a Breitling store is a great thing. Having a 5 Star restaurant is wonderful – for the 1% of the people who need them. Remember when you could buy breakfast for .99 and steaks for less than a $10 Bill? Remember when you could play on a machine for more than 20 minutes? Remember when the slot change person knew your name and called you by and it also asked about the grand kids? Chuck Hickey, Barona Casino, 4-16-15

Chuck is right, the casino industry, Vegas included, was built on gambling, cheap food and good, friendly service. In the process of diversifying, sometimes those values have been lost. The casino industry is dynamic and constantly evolving. Today major corporations in gaming, as in any mature industry, are ruled by accountants and MBAs. They see their role as one of controlling expenses and getting more profit out of the casinos. Las Vegas resorts get more revenue from retail, hotel, entertainment and food than resorts in other jurisdictions. Whether other casinos can manage those areas better or whether they should focus more on the basics of gambling, cheap food and good service is a hotly debated issue in the industry. It is a debate without an answer that is applicable to everyone, everywhere and all of the time. Diversification may not be good for everyone and because it is good for the Strip does not guarantee it is good for Cripple Creek, Biloxi, Detroit or other jurisdictions.


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