A recovery in the making
by Toon Van Beeck
February 1, 2010
The very sharp fall in turnover that U.S. casinos have experienced the last two years has not crippled the industry, and revenue is expected to rebound over the coming five years, expanding at an average annualized rate of 4.1 percent. This will be largely due to more robust economic growth from 2011 on.
For 2010, given forecasts of only marginal domestic economic growth, together with remaining levels of high unemployment, only sluggish growth in household disposable income is expected. This will flow through to only modest growth in consumer spending on all forms of gaming. However, for most of the industry, the improving economic environment as a whole will lead to some recovery in real revenue growth after two years of declines. Combined, the three core U.S. gambling-related industries (casino hotels, non-hotel casinos and lotteries and Native American casinos) are expected to grow by 2.8 percent over 2010, reaching $68.59 billion. (At its peak in 2007, just prior to the economic crisis, the industry generated $78.18 billion.)
From 2011 onward, growth will be far stronger as the U.S. and global economies begin to pick up steam and return to more normal operating conditions. This will help spur tourism and travel for both business and casual ventures, which will aid and support demand for casinos.
The rebound will play out not only in revenue growth, but the industry’s contribution to U.S. GDP will also improve into the outlook, with both profits and wages expected to grow in the coming five years.
Challenges remain
But despite the forecasts of relatively more robust economic conditions through to 2014, the industry will continue to face challenges.
First and foremost is the economy’s impact upon tourism. Domestic demand in the tourism industry within the United States is down about 6.6 percent over 2008 and 2009, and this has taken a toll on the industry, with the greatest declines, as you’d expect, occurring within the casino hotel sector (down approximately 16.4 percent through 2008 and 2009) and in non-hotel casinos (down approximately 15 percent).
In total, the industry will continue to face a highly competitive domestic environment, and this will require heightened levels of professional management in all operational areas to ensure that individual properties will remain viable. The competition for premium players, both from domestic and international sources, will intensify, and some casinos will withdraw from chasing this market in the short term as costs and incentives to attract it increase significantly.
Pursuant to this, slot machines will remain the most important revenue driver, and many casinos will continue to experience slow or declining growth in table gambling. This will be offset by much stronger growth in slot machines (especially in low-denomination games). Increasing slot machine revenue, however, does not necessarily translate to increasing food and beverage revenue, so overall revenues may still decline. But as slot machines continue to drive growth, providing low-denomination machines will continue to be a key, together with replacing machines and games on a quicker cycle. The rapid introduction of cashless machines (ticket-in/ticket out) has been a significant driver as well, lowering operating costs and enhancing profitability, and this will continue into the future.
In essence, operators need to prepare for another difficult year in 2010, stay attuned to a changing marketplace over the coming five years, and capitalize on the strong growth expected in 2011 and beyond.
Toon Van Beeck
is a senior industry analyst for IBISWorld, an independent publisher of research covering 700 different U.S. market segments. For more information, visit www.ibisworld.com.
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