A November to remember

Things are looking up in Nevada for the first time in a long time. The state’s casinos won more money from gamblers this November than they did last November. Yet there may be another story that isn’t as positive lurking beneath the numbers. From the LVRJ:

For the first time in 23 months, Nevada gaming revenues increased with casinos statewide collecting $873.2 million in November, a 4.35 percent climb compared to the same month a year ago.On the Strip, gaming revenues were also up for the first time in almost two years. Strip casinos collected $473.8 million, an 8.3 percent jump compared with the figures from November 2008.

In the locals market, November gaming revenues were up 19 percent on the Boulder Strip, almost 21 percent in North Las Vegas and 2.6 percent in the balance of the Clark County.

via Nevada gaming revenues increase for the first time in 23 months – News – ReviewJournal.com.

There are some very interesting patterns here. The big winners statewide were baccarat and pai gow, which increased 136.9% and 26.12% respectively. Slot machines actually did a little worse (down 1.58%), and since they account for the bulk of the state’s gaming, it’s very fortunate that bacc win more than doubled.

Does this mean that we’re out of the woods? Handle, rather than win, is probably a better gauge of consumer interest. Let’s look at the total money played on baccarat in the past two Novembers:

Month Win Hold% Handle
Nov 2008: $39,780,000 10.45% $380,669,856
Nov 2009: $94,237,000 13.54% $695,989,660

So while the casinos got much luckier in November 2009, the total amount played increased by about 83%. Even if they had won at the same rate that they did in November 2008 (10.4%), they still would have made about $73 million from baccarat–a definite step up.

Let’s look at slot handle:

Month Win Hold% Handle
Nov 2008: $558,114,000 5.73% $9,740,209,424
Nov 2009: $549,340,000 6.28% $8,747,452,229

So if you’re a glass-half-full kind of person, you can say that slot play decreased by about a billion dollars from year to year–not the stuff of a major comeback, and certainly nothing to pat yourself on the back about. The hold percentage increased by about a half-point. Could this have something to do with the decline in handle? It’s worth considering. While most of the increase in hold has been driven by players migrating to higher-hold denominations rather than managers tightening up existing machines, the decline in slot machine handle is cause for concern.

It’s paradoxical because players are voting with their feet in two separate directions. On one hand they are playing the high-hold denoms more: statewide win on pennies rose by about 10%, on multi-denom by 4%, and dropped off considerably for everything else, including massive declines in every denom over a dollar (though the $100 drop is complicated by a miniscule ,069% hold percentage). On the other hand, they are playing less, almost exactly 10% less than the year before.

Looking at hold is only part of the picture–looking at handle says a great deal more.

How about the Strip? Here are some highlights from November 2009: Bacc win, up 136%, pai gow, up 58%, and bingo, with total revenues of $212,000, up over 800%.
The lowlights? Craps was off by 32%, due in part to a lower than usual hold percentage; slots were down by about 4%, and sports books won much less in football betting than they did the year before, though the hold (5.23%) was a bit on the low side.

With slot handle down and bacc handle up considerably, the lesson seems to be that the high end is doing better than the low end. From that perspective, it’s good news for City Center and bad news for the lower-tier operators on the Strip and statewide. There appears to be some room for growth in the high-end market that will justify the increase in supply, but it looks like demand for slots continues to weaken.

In a nutshell: good news for some, but I’d keep the champagne on ice, at least until someone figures out how to get slot players to come back en masse.

The November 2009 visitor numbers are positive, with the caveat the the increase in visitation (2.9%) was slightly outdistanced by the increase in room supply (3%). People are coming back to Las Vegas, but they are spending less on their rooms (room rates are down 23% year-to-date) and less at the machines.

AC had a bad 2009

The Atlantic City gaming numbers are in, and 2009 was definitely not pretty. From the AC Press:

Casino revenue plunged for the third straight year in 2009, falling below $4 billion for the first time since 1997 as the soft economy and competition from neighboring slot parlors continue to erode the Atlantic City market.

Year-end figures released today by the New Jersey Casino Control Commission show that revenue from slot machines and table games declined 9.8 percent in December and fell 13.2 percent for the entire year for total winnings of $3.9 billion.

Analysts predict there will be no recovery in 2010 because of the persistently weak economy and even fiercer competition from the Pennsylvania and Delaware slot parlors. Both states will be adding Atlantic City-style table games this year in a major expansion of their gambling industry.

Atlantic City has been on the decline since peaking at $5.22 billion in revenue in 2006. Revenue slipped 5.7 percent to $4.92 billion in 2007 and was down 7.6 percent to $4.55 billion in 2008.

In contrast to Atlantic City, Pennsylvanias gaming market posted a 28.1 percent jump in December slot revenue, thanks to the grand opening of the Sands Casino Resort in Bethlehem and the Rivers Casino in Pittsburgh in 2009.

via Atlatnic City casino revenue off 13%, 3rd straight year of decline. – pressofAtlanticCity.com : Latest News.

You can check the Atlantic City casino stats page to verify that, indeed, Atlantic City has retreated to 1997 revenue levels.

Let me put that in a different way. The last time casinos made this much (or little), Bally’s Wild Wild West was the latest and greatest thing on the Boardwalk. Twelve years of growth–factoring in everything from the opening of the Borgata to expansions at the Taj, Tropicana, and Harrah’s–has been wiped out.

I’ve always been opposed to talk of a “death spiral” in my hometown, but it should be clear at this stage that the city needs some bold, dramatic action to turn things around.

If you want to read more about Atlantic City, check out Part II of my brief history of the Tropicana in the month’s Casino Connection. Enjoy.

Destiny on the Strip

If you haven’t read it yet, here’s a link to my latest from the LVBP:

But craps players and conventioneers both, even if they know of the efforts made by designers to craft a green building, are more likely to care about other things: How easy is it to get around this building? Does it make me want to enjoy myself?

via Las Vegas Business Press :: David G. Schwartz : Even amid severe slump for Las Vegas, casino operators can guide destiny.

This dovetails nicely with Chuck’s meditations on the artistry of Aria. The architecture doesn’t mean anything if the resort–and the people in it–can’t consistently get that kind of reaction from visitors.

In essence, I’m saying that they’ve built a lot of hotel rooms on the Strip, and now they have to find ways to keep them full. It’s not going to be easy. And just waiting for better times to return is clearly not going to move things forward.

The point I’m trying to make is that I’ve seen a lot of thinking along the Strip that’s reminiscent of students and gamblers. Here’s what you usually hear when grades come out:
“I got an A in the class.”
“The professor gave me a C.”
In other words, we’re responsible for our successes but not our failures. You don’t have to walk very far through a casino to hear this same mentality at work among gamblers. And these days, you can even hear it upstairs in executive offices.

Back in 2006, I didn’t see any annual reports saying, “Because of rising consumer credit and escalating personal wealth, we’re doing a bang-up business this year.” Instead, it was the bold leadership of the management team that was responsible for all the big rise in shareholder value.

Fast forward a few years, and we hear that “Due to a sagging economy, we’ve had lower than expected earnings.” Well, by now they’re usually expected to be pretty low, but you get the point.

I understand that no manager’s going to come out and say that they’ve done a lousy job of marketing and staffing their property, but it’s important to be more honest internally. Maybe it’s just semantics, but I think what people say reveals a lot about what they’re thinking. In this case, it’s very important for people to accept that the bad economy didn’t do anything to them: the choices they made, whether it was taking on too much debt or not maintaining service standards and the perception of value, put them into the predicament they are in today. They are fully capable of finding a way out of it.

Looking at 2010

Here’s some breaking news: things don’t look so hot for 2010, at least if you’re in the casino business. From the LVRJ:

The impact the recession had on the casino industry in 2009 has not been completely accounted for, but by all measures the year will go down as the worst on record.

Through October, gaming revenues have declined more than 12 percent both on the Strip and throughout Nevada. Monthly revenue figures statewide have fallen to 2003 levels.

Get ready — 2010 may not be any better according to one casino industry analyst.

Fitch Ratings Service, which follows the high-yield bond markets, believes gaming revenues nationwide will continue to be pressured by the economy. Spending trends remain weak and unemployment will continue to reduce how consumers dole out their discretionary dollars.

via CASINO INDUSTRY: Outlook: Unfavorable – Business – ReviewJournal.com.

This is where the casino executives earn their keep. It’s easy to run a profitable resort when the market’s expanding by five percent each year. When it’s shrinking, it’s another story.

I’m of two minds about the continuing economic gloom. On one hand, we won’t just wish our way out of it. On the other, it seems that this is just a continuation of the long-standing predicting trend of extrapolating the present into the future indefinitely.

This is one of the reasons that trying to predict the future, in any except the most rudimentary ways, is futile. Over the past few weeks, I’ve had several reporters ask me if 2010 will be better than 2009. I have told them all that I just don’t know. Of course, if I said, “Yes, it will get better” or “No, it will get worse,” I’d have about a coin flip’s chance either way. There are simply too many variables to try to forecast what’s going to happen except in the most basic terms.

Casino executives should prepare for a challenging year and focus on delivering a combination of value and favorable experience to their customers. Simply dropping room rates then cutting levels of service will be harmful in the long run. In order to compete with the mushrooming number of gaming options, destination casino resorts will have to offer both good deals and unique experiences. In the past, they’ve usually offered one or the other; now, they have to deliver both.

It’s not going to be easy, but battening down the hatches and waiting for the crisis to pass isn’t going to get the job done. That seems to have been the dominant industry paradigm for about two years now (with a few exceptions), and it’s not a viable long-term option.

It will be important for casinos to concentrate their resources where they can make the most favorable impact on customers, be it on the casino floor or off it.

Thoughts on October Revenues

The Nevada gaming revenue figures for October have been released, and they don’t look promising. From the LVRJ:

Nevada gaming revenues hit a new low in October. Statewide gaming revenues were $800.3 million, the lowest monthly figure in almost six years. The decline was 11.6 percent compared with $904.9 million reported a year ago.

October marked the 22nd straight month of declining gaming revenues.

On the Strip, gaming revenues were $426.3 million, a 10.3 percent decline compared with $475 million reported a year ago.

All but two areas of Clark County reported double-digit gaming declines; the Boulder Strip was down 6.3 percent while North Las Vegas casinos were up 3.3 percent.

Nevada gaming revenues decline 11.6 percent in October

Both the Boulder Strip (M) and North Las Vegas (Aliante Station) have added major new capacity since last year, so naturally those numbers are better than last October.

I wanted to take some time and really dig into these, but it looks like that’s not going to happen today. I’ve got a Vegas Gang podcast in about 15 minutes.

What I would have done, if I had the time, was to correlate the revenues with news that visitation is up over last year’s. I don’t have the time to do a comprehensive quantatative analysis, but here’s the gist of it:

Room rates have fallen precipitously (nearly 14 percent) from last year’s. Assuming an average stay of three days, the average guest should save $48 on their hotel. Add in taxes, etc, and you can round to $50.

The problem is that they’re not spending that extra $50 on gambling. People are just spending less overall, and lowering room rates doesn’t seem to be doing the trick of increasing gaming revenue.

This suggests that there is no magic bullet solution (“cheap rooms! cheap food!”) that the operators are too clueless to figure out that will boost gaming revenue. Instead, they will just have to wait until the people who’ve been coming here have more money, or find a previously-untapped group to compensate.

There isn’t a shortcut. The only way out is delivering value and service to those who are still coming. Easier said than done, I know, but it’s better than the alternative.

Billion-dollar musing in the LVBP

In the midst of all the talk about Vdara, I thought I’d mention my latest article in the LVBP:

While doing some research, I recently happened across an article in the July 1997 issue of Casino Executive magazine in which then-Harrah's Entertainment CEO Phil Satre sounds downright oracular.

“If you're the last person to build that last $1 billion project in Las Vegas,” he told the magazine, “you might be wishing you hadn't spent your money that way.”

Today, it seems obvious that he spoke correctly. Many people still come to Las Vegas, but their numbers don't seem as boundless. Those who bet on a constantly expanding market for what Las Vegas offers look to be guilty of irrational exuberance at best, while most of the rest of us are wondering why so few people were betting against that kind of growth.

via Las Vegas Business Press :: David G. Schwartz : The last billion-dollar casino marks end of an era in Las Vegas.

It’s an elaboration of an idea I started in a post here two weeks ago. Interesting timing in regards to two events this week: the opening of City Center and Harrah’s looking to buy Planet Hollywood.

As for my thoughts on the latter, I don’t think that when you look at Harrah’s Entertainment you can say that one of the company’s problems is not having enough hotel rooms on the Strip. On that level, this move just doesn’t make a lot of sense to me. Do having another 2,500 rooms to fill justify taking on additional debt to buy a traditionally troubled property? Since Planet Hollywood is clearly not a “turnkey opportunity” with a guaranteed cash flow, I don’t understand why the company would use this money to buy another Strip property as opposed to expanding a regional operation somewhere else and diversifying their cash flow.

Also, this is a very 1990s type of expansion, in that the company is spending a great deal of money to buy an asset that may produce revenue. Contrast this deal with MGM Mirage’s latest moves, signing development agreements and management contracts overseas that don’t require it to buy any assets but will allow for cash flow. Like I said in my review of Managed by the Markets, this is what companies in other sectors are doing and, within the constraints of today’s markets, seems to be a better strategy for delivering value to shareholders (or bondholders).

And it’s amazing that twelve years ago Harrah’s CEO was so hesitant to buy or build a second property on the Strip, while now the company is charging ahead to buy its tenth casino there. It’s a totally different company.

An alternative to low room rates?

Is the law of supply and demand catching up with casino hotels in Las Vegas? Binion’s hotel downtown is closing, which may be a sign of things to come if casinos aren’t able to raise their room rates and/or maintain high occupancy. From the LV Sun:

Binion’s Gambling Hall & Hotel in downtown Las Vegas will close its 365 rooms on Dec. 14 and lay off about 100 workers.Spokeswoman Lisa Robinson said the decision was made as a result of the economic downturn, which has decreased occupancy at the property and other hotels across the Las Vegas Valley.Robinson said Binion’s also will close the Binion’s Original Coffee Shop and discontinue keno. The casino, sports book, poker room and Binion’s Ranch Steakhouse on the property’s 24th floor will stay open.Robinson said the decision was made Friday. She said Binion’s hasn’t determined when the rooms might reopen.

via Binions to close all 365 rooms, lay off 100 workers – Monday, Nov. 30, 2009 | 11:14 a.m. – Las Vegas Sun.

With an impressive amount of high-end room supply due to come on the market, there will doubtless be pressure on everyone to remain competitive. If B-class properties are going for $80 a night and C-class properties are going for $30, it’s hard to justify spending $25 to stay in a D-class property. If room rates fall throughout the market as they have, at some point the cost of keeping rooms open exceeds the revenue they generate, and they will have to close.

This is a slight contraction in supply–just about equivalent to what Harmon will add when it opens–but it doesn’t bode well for the market. At least one operator is sufficiently pessimistic about the near-term future to take this extraordinary step. It wouldn’t surprise me to see more partial shut-downs like this before things turn around.

Recession evolution

The big talk at G2E has been the recession. Last year, it was how to fight it. This year, it’s how to survive it. Anyone else get the sense that we’re living in an age of rapidly diminishing expectations? Here’s a bit from the story from the LV Sun:

The recession is forcing Las Vegas to return to its roots as a more value-oriented destination, and that’s not a bad thing, Boyd Gaming President and Chief Executive Keith Smith said.

“The town has now evolved back to its original roots,” Smith said Wednesday at the Global Gaming Expo. “I think the industry will continue to evolve and refine itself and eventually find a norm between value and high-end.”

via Boyd chief: Recession forcing Vegas back to roots – Las Vegas Sun.

Later in the story, there’s something that must be a typpo:

But with the addition of new technology, costs have increased and operators aren’t buying. Khin said slots stay on casino floors for an average of 25 years without replacement.

That’s impossible. If that were true, most of the machines on casino floors would have been installed in 1984. Slot managers would buy one set of machines when the casino opened and then wait a quarter-century (on average) to buy more. In that case, why would they have a big annual trade show to showcase the newest slots if managers keep machines for 25 years? Is it actually 2.5 years? That seems right. Hopefully someone over at the Sun can clarify that.

Smith makes a great point. I think that perception of value–rooted in real value–is going to be the key for Las Vegas for the conceivable future. The high roller/low roller tilt in this town is definitely a cyclical phenomenon that’s rooted in supply and demand: we’ll be in a low-roller turn for a while, but once things come back room rates and ticket prices will start creeping up again.

Remember, this is an industry where casinos in a city that’s been steadily losing ground (my hometown of Atlantic City) charge people $10 and more to park just because they can. Things like this don’t bode well for the customer. I’ve really got to question the aptitude of an executive who thinks that having customers’ first experience of their resort be reaching into their wallet to pay for something they can get for free elsewhere provides the foundation of a good customer experience. Sure, they don’t do that in Las Vegas, but several casinos tack on resort fees and other add-ons that have a similar effect.

My still-in-process slot hold study indicates (if I’m reading this right, and you may read it differently) that ultimately price isn’t the major determinant for players, it’s entertainment value and convenience. As a group, players are choosing higher-hold, flashier games over lower-hold, more sedate ones. Can this insight be applied to the non-gaming dimension of casino resorts? I think so, and this may be the key.

Higher hold=less play?

As you may know, I’ve been immersed in a mammoth study of Nevada casino slots’ hold percentages. It’s driven by the question: “Does raising hold percentage actually decrease play?”

That would seem to be the intuitive answer. If people get less value for their dollar (assuming that value=time on device), then they will be less ready to play.

The revenue statistics, however, don’t seem to say so. Here’s a chart that shows the total number of slots, the win, the hold percentage, and the total amount played, or handle, for the Las Vegas Strip 2000-2008.
strip_hold1

As you can see, both handle and win steadily rise after the 2000-3 decrease. The hold percentage increased during the slump, and continued to go up as the handle and win grew.

Here’s another chart that may make more sense visually. I’ve had to multiply the hold % by 10,000 to get it to show up.
strip_hold2
It doesn’t seem that rising hold percentage has anything to do with the handle. If it did, you’d expect to see handle falling as hold percentages go up.

This is where it gets tricky. You can spin it just about any way you like. Those arguing for loose slots can say that in 2008 casinos reaped what they had sown as players finally got fed up with tighter slots. But the visitor numbers don’t bear that out: people who came to Las Vegas still played, tight-slots advocates might argue.

There doesn’t seem to be a direct correlation, and the fact that revenues grew most impressively during years with big jumps in hold suggest that something else is at work here.

It’s worth mentioning that, thanks to higher hold percentages, that in 2008 total handle fell to 2004 numbers, but slot win fell only to 2005 numbers. That’s an argument that most executives–and shareholders–would probably find persuasive.

Comparing 2008 to 2000, we see more than $800 million more in revenue and over $6 billion more in play, with an installed base that’s shrunk by about 18 percent.

This is why the slot hold study is taking a while–it seems like every time I look at a source of data that will conclusively prove a link between hold and revenue (one way or another), I’m back to square one. After analyzing revenues, I thought that hold might be a fruitful avenue, but I’m still back where I started.

It doesn’t seem possible to prove a connection between hold and handle, and higher holds have led to consistently higher revenues. It’s just possible that the bean counters are right. On the other hand, handle has been falling faster than win, so those who demand looser machines may have a point. On the third hand, a decrease in hold percentage did not figure in the 2004-2007 boom. There just doesn’t seem to be a correlation.

In the paper, I explore some theories for the climbing hold percentages that may suggest the true reasons for the increase have less to do with the dictates of slot managers than changes in technology and player preference.

21 and counting

Gaming revenues fell about 9 percent in September, compared to the previous year’s take, as the slump continues for a 21st month. From the LVRJ:

Nevada gaming revenues fell for the 21st straight month in September.Casinos statewide collected $911.1 million during the month, an 8.99 percent decrease compared with a little more than $1 billion won from gamblers in September 2008.
On the Strip, gaming revenues were $506.4 million, a decline of 3.58 percent compared with $525.2 million a year ago.Other areas of Clark County suffered much deeper declines during September. Boulder Strip casinos were down 28 percent, and the balance of the county was down 20 percent while Mesquite and Laughlin both recorded 12 percent drops.On a whole, Clark County was down 9.3 percent.Every reporting area of Nevada was down compared to a year ago.September’s gaming revenues translated into a 14.56 decline gaming taxes collected by the state. Nevada collected $54.3 million during the month, compared with $63.5 million a year ago.

via Gaming revenues decline almost 9 percent in September – Breaking News – ReviewJournal.com.

In honor of the 21st straight month of gloom, I’m going to do one of my customary numbers breakdowns. See one man, sitting at a computer, spend enormous amounts of time and energy to look behind the numbers and see what’s really going on. In all likelihood, my conclusion will be, “Casinos didn’t do as well this year as they did last year.”

Since every area was down, I’m not going to break things down by reporting area, which admittedly adds a lot of detail but, on the other hand, takes a great deal of time, which I don’t have a lot of today. I will say that year-year declines are awful news for the Boulder Strip and North Las Vegas areas, since they both added major news casinos (M Resort and Aliante Station) since last September. Things were particularly gruesome at the craps tables on the Boulder Strip–they made only $222,000, with a paltry 2.27% win percentage. Last September, about $11 million was played at Boulder Strip-area craps tables; this September, about $9.7 million was wagered. People are playing less, and this month they got luckier.

Back to the statewide analysis. Let’s compare numbers for the past four Septembers to put this in perspective.

(Poker tables included in parenthesis)
(Poker tables included in parenthesis)

The shrinking of Nevada’s gaming industry continues. In four years, the state has lost 321 table games and 8,301 slot machines. That’s a 4.6% reduction in the total number of slots in the state and a 5.4% shrinkage in the number of tables. The problem is that since then revenues have shrunk by 7.4%. There are fewer seats for players, but they are playing less at the remaining games than they were four years ago.

Looking at slots, in September 2006 players wagered a total of about $13.9 billion on the one-armed bandits.* In September 2009, they only played about $9.1 billion. That’s a 34.5% decrease, which puts the 4.6% decrease in the installed slot base into perspective. There’s a lot less gambling going on in Nevada these days.

I find it interesting that the win percentages have run in opposite directions from September 2006 to September 2009. Table win percentage declined by about 1 percentage point, while slot win percentage increased by about 1 percentage point. I’m incorporating the new numbers into my epic 1992-2009 slot hold study, which is nearly finished and I’m looking forward to seeing what the new numbers mean for the study. Is there a trend, or just a bunch of random walking down the Boulevard?

The shrinking installed base and revenues has implications for Nevada’s tax structure. Look at it this way: In September 2009, the average Nevada casino slot machine made $115 per day. Of that, the state took $7.76 cents out in gaming taxes (there’s also a $250 annual license fee, but we’ll ignore that for now). Considering that the slot base has shrunk by 8,301 since September 2006, that means that, from slot machines alone, the state is getting $64,415.76 less per day in tax revenues from slot machines if people continued to play them at current levels. Extrapolated over a year, that’s a $23,511,752.40 shortfall. That might look small in comparison to the state’s $18.5 billion fy 2010 budget, but it’s a definite problem.

So what does all this mean for the future, particularly the impending increase in gaming supply that City Center will bring in less than a month? Table play actually improved statewide this September, so that could bode well for high-end play. Slots remain in the doldrums, however, and it is hard to see what can reverse that trend.

On the other hand, visitor volume actually increased for the month, so there is some cause for optimism. But it’s clear that the visitors aren’t gambling as much as they once did.

___________________________________
*I calculate the total handle, or amount played, by dividing the total win by the win percentage.