Room rates, 2009, and the future

Because we can’t wait for the future, everyone wants to know what’s going to happen. Spectrum Gaming has a 21-point list of what to expect, but I’ll give you my own views, focusing mostly on Las Vegas.

This is all with the caveat that, as I often say, “my work is not predictive.” That’s just a fancy way of saying I can’t tell the future, and a more polite one, too.

With energy prices and room rates down, I can see a rebound in business, but depressed room rates (relatively speaking) might reverse the steady trend of gaming revenue’s decline as a portion of total revenues.

That’s wordy–let me put it plainer: in 1984, Strip casinos made more than 58% of their total revenues from gaming. That number held fairly steady until 1994, when it began an unprecedented slide. In 1999, the figure dipped to 48.1% percent, and from 2005-7 it hovered between 40 and 41%.

With room rates down and consumers spending less freely on shows, expensive meals, that number may start to move in the other direction. If gaming revenues decline proportionally to room rates, we are in trouble. Year to year, they were down more than 14% in October, and occupancy was down more than 6%. That means a 20% total drop in room revenues. If gaming revenues fell by one-fifth for the year, the state’s budget would probably implode.

So, to borrow a phrase from Mr. Mom, somebody better figure out a way to get people gambling in Las Vegas pretty fast.

Slashing room rates and offering generous comps may do the trick, but what will the consequences be?

When analysts pencil out expected return on investment for future properties, they’ll note the trend of falling room rates. So builders won’t be able to borrow as much money to build higher-end rooms, since you can’t justify spending the same on a room that’s going to earn $110 a night as one that will pull down $160. The next wave of casinos might be a step down in terms of detailed finishes from what we’ve been seeing.

With casinos making more money, proportionally, there will be a greater drive to maximize revenues, which in the end will mean more labor-saving devices, fewer employees with their pesky wages and benefits, and, in the end, greater control over comps. It might be easier to give away a $90 room than a $250 one, but I think casino departments will have their feet held to the fire to maximize their revenues. In the long run, this might not be the same as optimizing them.

Since gas prices have fallen quicker than airlines have added capacity, I see a quicker rebound in drive-in traffic than fly-ins, which means generally stronger results for companies sensitive to value shoppers. The question is, once people have $250 a night to spend on a room, will they be willing to do so if they’ve just spent $90 a night? Or will they feel gouged?

While 2009 will see some great deals for people coming to Vegas, I think that everyone should be aware of the unexpected consequences of cheaper rooms. It may change the face of Vegas in ways that will please some, but not others.

4 Responses to 'Room rates, 2009, and the future'

  1. mike_ch says:

    Well, with all respect to Encore and how nice it is, I want a few less Encores and a few more Luxors as far as the construction pipeline. Back when you had Treasure Island and Luxor and MGM, then NYNY and Paris all being built without the intention of going after the creme de la creme. I’ve been told for ages that it’s land values that had everyone building with five-diamond status automatically assumed, but the ridiculous Frontier land values were blunted by the TI sale and anything else coming.

  2. mike_ch says:

    Sorry for posting twice in a row.

    The other thing you either have no expectation to come back, or aren’t considering, is a return to loss-leader style business where one activity (usually the casino) is treated as the bread and butter and the other is stuff that is nice to make money but isn’t expected to. Back in the day, it didn’t matter if F&B was losing a bit of money by practically giving food away, because the whole joint lived or died on the casino floor and if a ridiculously good food value drew them in, whatever.

    Now every department is a cash register and each arm of the octopus is has to pay for itself and meet a minimum expectation of additional profits and if the hotel rooms or the steakhouse or the gift shop or what have you isn’t meeting their goals, people’s jobs disappear in a restructuring.

    For at least five years we’ve been saying over and over that there’s no more $2.99 steak and shrimp dinners to be had anymore, but the real story there isn’t the absence of ludicrous bargains, it’s the disposal of the idea that it’s okay if one division isn’t making any profits to call it’s own because the casino is carrying them and they’re contributing to keeping the casino busy in a way that doesn’t register on paper. Now it’s all about what’s on paper.

  3. Dave says:

    You hit the nail on the head in the last sentence. I don’t think that anyone can get $600 million for a new tower and say that casino revenues will pay for it–though they very well might. Instead, the financial guys want to see how these things will pay for themselves.

    You’ve got to couple that with the 30-year trend of slots dominating table games in most markets. It boils down to more cost and profit certainty. Shareholders want short-term games and are scared by the natural volatility of the casino world. It’s no surprise that as casinos have become publicly-traded, they’ve shifted their profit centers to less volatile areas.

    But, as many folks are learning now, that might not be the best way to run a casino in the long run.

    That’s why I’m saying that there are unintended and unforeseen consequences for every decision, and things that seem like a great idea today might not be so hot tomorrow.

  4. weave says:

    i absolutly agree with the above comments and wish to add this.

    slots dominating table games is ok in the long term as they are far more profitable. (for the casino)

    that said i think eventually the “bean counters” will destroy casinos as we like them.

    las vegas was once a place where gambling was king. what has happened in the last couple decades?

    they went after kids and familys and found out they dont gamble much… but in that time they figured they needed to make money elsewhere, like on food and “entertainment”. then they found out we need to get back to vegas as sin city, lets make a bunch of clubs with 10.00 drinks… guess what they dont gamble much either…
    what happens in vegas stays in vegas….yeah lets get the 20 and 30 somethings…. guess what they have the money to nightclub, get drunk and sleep.

    the folks that drive vegas are the once or twice a year visitors, who bring their 3-5 thousand, lose it and go home. they go to indian or local casinos more and more as the expense of going to las vegas doesnt make sense. they dont want to pay for drinks, if they do they can do that at home. they want cheap good food, otherwise they can stay at home. get the picture? etc etc…

    all in all i love vegas but feel neglected at the old old age of 50…. sigh