MGM Mirage, the nation's second-largest casino company (its trophy properties include the Bellagio and MGM Grand), reported disappointing results in late October, and the stock was hammered. MGM Mirage was hamstrung by the loss of properties in the Gulf Coast, which was no surprise. But the company also warned that things aren't quite as hot as was thought in its core market of Las Vegas.
The key financial metric for hotel/casino companies is REVPAR—revenue per available room—or how many dollars per night you can squeeze out of a guest's spending on mini-bars, spa services, room service, and blackjack. For the fourth quarter of 2005, MGM Mirage expects REVPAR will rise 6 percent at its Vegas Strip properties—down from 13 percent growth in the fourth quarter of 2004. For casinos, as MGM Mirage's Web site notes, it's all about momentum. And so the soggy forecast had investors rushing for the exits like a bunch of hipsters trapped in a Céline Dion show.
MGM Mirage and other giant gambling companies like Harrah's face two problems. The first currently bedevils all companies that depend on consumers to blow discretionary income on their products and services: the lethal cocktail of inflation, rising interest rates, and weak income. Few people need to gamble or to buy the food, booze, and baubles on offer in Vegas. And Las Vegas caters to the middle- to upper-income consumer who may just be starting to feel the pinch. (This neat 2004 survey by Harrah's suggests that American gamblers are a little more professional, educated, upscale, and more likely to vote Democratic than the American public at large.)
The second problem is more industry-specific. In theory, with the economy growing and Katrina having knocked out a good-sized chunk of the nation's gambling capacity, Las Vegas should be doing well. After all, Americans have shown a seemingly limitless capacity to lose money and engage in games where the odds are against them.But while Las Vegas and its environs boast massive population growth and new construction everywhere, the deck may be stacked against the operators of huge hotel/casinos. The ultimate boom town may be maturing as a city and as a destination for tourists.
Thanks to the stunning growth of new gambling dens like Foxwoods in Connecticut, new investments in Atlantic City, N.J., and the proliferation of Indian casinos all over the country, gamblers no longer have to trek to the desert to piss away their hard-earned money. As the Las Vegas Convention and Visitors Authority notes, there "are more than 440 high-stakes casinos in the United States, and further expansion is expected over the next 5-10 years." Meanwhile, Indian casinos, which accounted for about 40 percent of nationwide casino revenues in 2003, are expanding in the gigantic market adjacent to Las Vegas: California.
For the hotels and casinos, the key is to get bodies from out of town into hermetically sealed environments where they're captive spenders. According to the LVCVA,Vegas is having a lot of success convincing business customers to check in, as shown by the impressive growth of trade shows. But look at the overall numbers. In 2004, LVCVA said 37.4 million people visited. This year, it expects 38.2 million visitors, up just 2.1 percent. And expectations for the near future are muted. LVCVA has a goal of attracting 43 million visitors in 2009. That represents a 12.5 percent increase in four years, or about 3 percent a year.
That's not bad. But it's hardly booming. And while there are more people coming to Vegas—through August, these statistics show visitor volume is up 3.1 percent—the challenge for MGM Mirage and its rivals is that the visitors have more hotels to choose from. Through August 2005, room inventory grew more rapidly than the number of visitors, by 3.7 percent, and now stands at 133,000 rooms. As a result, hotel occupancy levels are down fractionally. Another key: Through August 2005, tourism room nights occupied (that is, the number of tourists multiplied by the number of nights they stayed) fell 2.3 percent.
When tourism was booming, it was easy for companies to rake in big bucks just by putting up glitzy new hotels and rolling out the red carpet. (Here's a nice roundup of new openings in Vegas in recent decades.) But when growth shifts into a lower gear, consolidation becomes the order of the day. Companies can save money by cutting overlapping business functions. More important, it takes some of the cutthroat competition out of the market. And in the past year, there's been plenty of consolidation, with MGM Mirage buying Mandalay Bay Resorts and Harrah's buying Caesars.
In theory, more casinos in the hands of fewer owners should be good news for room rates—there's less competition among companies. But there's more capacity in the works. And every time a splashy new resort like the Wynn Las Vegas opens, incumbents have to increase marketing—i.e., cut prices.
The new environment also has hotel/casino managers talking less like slick showmen and more like management consultants. "We're aware that in recent weeks concern about Las Vegas room rates have made some observers skittish," Harrah's CEO Gary Loveman said in the Financial Times this week. "Even in a changing economic climate, however, our sophisticated revenue management systems are our best ammunition against room rate fluctuation and retail pressure."
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