Las Vegas has gotten its arms around the new normal. Now if the economy would just cooperate...

Party pits with go-go-dancer-like hosts, such as the Golden Gate scene pictured here, and other attractions designed to entice the young and adventurous have found a home in downtown Las Vegas casinos.


“The Fremont Street Experience is doing a great job; they had their third straight summer concert series, which brings a lot of people down on Saturday nights into a vibrant atmosphere.”
Derek Stevens, co-owner, Golden Gate

Over three years into The Great Problem, Las Vegas finally looks to have its ducks in a row. Well, the ones it can control.

With Strip revenue up 7.5 percent for the year through July, it’s tempting to say the worst is over. Operators have kept up visitor counts throughout the recession with aggressive discounting, ramping up the fun factor with party pits and other goodies for younger customers. Room rates are rising off their bottoms to the point where they are no longer the most remarkable bargains in town. This is at least partly due to the welcome absence of significant additions of new hotel rooms to the supply pipeline. Other positives include Caesars’ new Linq project, which gets generally high marks for being a creative and differentiated addition to the city, and Downtown, which has enjoyed a steady revival. Meantime, globalization has shown itself to be a net positive, especially for the large operators who have a foothold in Asia.

Jeremy Aguero, principal analyst, Applied Analysis, ticks off the positives. “You’re seeing visitor volume being up over the past year-and-a-half; traffic volume over I-15 up over the past 24 months; domestic and international tourism increasing; airline inventory in terms of seats up; in-plane and de-plane passenger counts into McCarran International up; occupancy rates up. Gross gaming revenue has been positive for a few months now. The only thing left is the meetings and conventions business and that is looking good for the reminder of the year.”

It would be champagne time, save for one not-so-minor detail: The economy. The unemployment rate seems stuck at 9 percent and consumer confidence is at record lows; hitting 44.5 percent last month, which Dave Schwartz, director of UNLV’s Center for Gaming Research, termed, “awful.” In the good times, it’s closer to 90 percent. Economic uncertainty looks like it will be with us for a few more years and it is real. When the term “ponzi scheme” enters everyday language, and too many average Americans know there’s a debt crisis in Greece, instability is a safe bet. But so is the enduring appeal of Las Vegas.



“Las Vegas is still the titular Mecca of gaming; it is still an interesting option for people here. While Macau is so much closer and you don’t have to go to Las Vegas to see the world’s most expensive water show anymore-that title belongs to Melco Crown-growth in Asia will eventually help Las Vegas as well.”
Dean Macomber, president, Macomber International

WHATEVER IT TAKES

Even during the toughest times post-meltdown, Las Vegas visitor volumes never declined more than three million off their previous high of 39 million, which is again being achieved this year. That’s a tribute to the city’s tourism product. It also says a lot about discounting. Both the aggressiveness of the deals being offered and consumer demand for it.

“Consumers have gotten better at picking and choosing and looking for deals,” said Anthony Curtis, publisher, Huntington Press, whose Las Vegas Trip Advisor website has earned him the title of resident couponomist. “I remember the go-go years, everyone said, who cares? I’m going to go here, no matter what. If I see some deal along the way I’ll take advantage of it as opposed to something else, but I’m not really going to go out and seek it.”

More operators realized they had to do things to give people the “entitlement,” as Curtis calls it, they needed to start spending. People needed spending starters that got them here in the first place and that got them to start having a little bit of fun.

“The discounting of room rates has been the main trend, the quality of the happy hours is another,” said Curtis. One indicator that room rates are creeping up is that, for the first time in about two years, none of the Trip Advisor’s Top 10 deals was a hotel room late last month.

Happy hours have obviously been around forever; what’s new, according to Curtis, is happy hours in four- and five-star venues, like Seablue at the MGM Grand and American Fish at Forum Shops. “Some of these happy hour deals have been really amazing,” he said. “Right now on our Top 10 we have what they call the Oyster Riot Happy Hour at PJ Clarke’s, a bar from New York that recently opened in the Forum Shops. You go around to the high-end places and you’re paying $3 for oysters on the half-shell and up. Here they do $1 an oyster six days a week for three hours a day. You get a fantastic plate of fresh oysters mostly from the northwest, two-for-one beers…it’s really strong.

“Happy hours are getting longer as well; you might have double happy hours in one night; what’s called reverse happy hour. They may run one from 3:00 pm to 6:00 pm, and then run one from 9:30 pm until closing. Everywhere you look there’s a sign out there that says happy hour. We can’t keep up with them. Simon at Palms Place has a terrific sushi-and-drinks happy hour. Buzio’s at the Rio has the best shrimp cocktail deal you get in town; you get these five humongous shrimp, the kind you pay $2 and $3 apiece for, for $7. You could really have a good time in Vegas these days on the high end. Or you can go slumming it for beers that are $1 or $1.25 apiece.”



Clubs at The Palms and other Las Vegas resorts have prospered in tough economic times by extending happy hour bargains well into the evening.

On the gaming side, Curtis is also seeing growth in rebates on losses. Operators like to use the $100 figure; join our club and get $100 free roll. If you win from that, everything you win you get to keep. “That’s a pretty valuable perk to give somebody for a new slot club sign-up,” said Curtis. “We’re seeing more of those; two or three running at the same time whereas in the past they would only come along once in a while. In fact, the Tropicana has a $200 rebate. You only get half of it up front and the other half on a return visit within the next month.”

There are limits to what Vegas operators can and should do on the discounting side, but there is also room to go deeper.

“You can only push things so far,” said Schwartz. “When you see people bringing in cases of beer; not only are you letting the room go for $30 or $40, you’re not getting any gaming or F&B spend. If it costs you $32 to clean that room per your union agreement, you should just give them $2 and tell them to stay home. Wynn, Venetian, Cosmo, on the other hand, they’re starting to get good money for the rooms. But when everyone starts to try that model, that’s when Vegas starts to look too expensive and you get in trouble.”

That said, non-gaming prices are in many cases still not aligned with lower room rates. “There has been heavy discounting on the room rate side, but I don’t see that level of discounting in other cash businesses,” said Randall A. Fine, managing director, The Fine Point Group. “Yes, you’ll find some food specials, but food is still fairly expensive. Nightclubs don’t discount at all. We certainly haven’t returned to handing out free show tickets as in the past. While room rates have been used to some degree as a loss leader to get people to come to Las Vegas, once they’re there, many of the other ways to get them to spend money continue to be somewhat expensive. And that makes sense, because when people plan a trip to Las Vegas, they tend to look at airfare and hotel rates. They don’t tend to put together a complete budget; everything else is sort of an afterthought. I think there’s still room for further discounting in these non-hotel cash businesses.”

One challenge in the other non-gaming businesses is that they often have complicated management structures, said Fine. All operators control their own hotel rooms, but they may have hands-off arrangements with the celebrity chef that runs their restaurants, or the producer that’s putting on their shows, meaning they don’t necessarily have the same flexibility as with rooms. “I think a lot of these food and beverage outlets, retail and entertainment outlets have lots of opportunity to reinvent themselves for the new, value-oriented customer,” he said. “There are still a lot of expensive restaurants that have a lot of people walking around and looking at them but not a lot of customers. That’s a shakeout that’s still to come in Las Vegas.”



GLOBAL IMPACTS

Revenue-wise, Macau has left the Las Vegas Strip in the rear-view mirror during this economic downturn, generating five times more gaming win during the first eight months of the year ($21.7 billion). While this growing stature gap has occasionally been a little hard to take from the standpoint of local pride, look a little closer, and Las Vegas has done very well by Macau and greater Asia, thank you.

Compare, for instance, the health of Vegas-based operators who have a presence in Asia with those who don’t. “Las Vegas Sands is in great shape because they have two properties in Asia that are grand slam home runs,” said Andrew Zarnett, managing director of Deutsche Bank’s gaming, lodging and leisure high-yield debt practice. “That takes pressure off Vegas operations. They generate so much EBITDA and free cash flow in Asia that they don’t have to worry about Las Vegas. MGM has been helped by their Macau property as well. The transaction that they were able to do was very strong and has put that company in a good place.

“Quite frankly, the operations in Macau have been a huge benefit to Wynn, LVS and less so but still significant for MGM. The Asian diversification of those three companies has been significant for their survival and growth.” He added that Caesars Entertainment, whose gross leverage in 12X (the average for the industry tends to hover around 4X or 5X), has suffered in comparison for the lack of a project in either Macau or Singapore.

Moreover, the cross-marketing that was supposed to happen on the high-end between Las Vegas and Asia is actually happening, even if, as the numbers suggest, it’s not easy prying Asian gamblers away from Asia. “I subscribe to the theory that gaming begets gamers,” said Dean Macomber, president of Macomber International, a Manila-based consultant with worldwide casino management experience. “Las Vegas is still the titular Mecca of gaming; it is still an interesting option for people here. While Macau is so much closer and you don’t have to go to Las Vegas to see the world’s most expensive water show anymore-that title belongs to Melco Crown-growth in Asia will eventually help Las Vegas as well.”

Schwartz said Las Vegas is already seeing benefits on the high end. “There’s not too much of an incentive for people who are just coming over the border, firing some money at the baccarat tables and going home,” he said. “But if you look at the very high end, there’s definitely incentive for them to bring them out here. The effective tax rate in Macau is 39 percent; in Las Vegas it’s 6.75 percent. So if you’ve got a player whose theoretical win is $1 million, you’d pay $390,000 in taxes on that level compared with less than $70,000. When it gets to that tipping point of what it costs to fuel the charter flight to fly back and forth to pay a pilot, that’s where you’ll see it happening.”

“There’s no doubt this is happening,” said Zarnett. “They’ve been able to attract new customers and in some cases existing customers have found there are options to play in Macau and Singapore. On the other hand, new customers that they didn’t have a relationship with before now are coming to Las Vegas for the first, second and third times. Net-net, Asia has been a big positive for Las Vegas.”

In general, international visitors have been a stable source of volume during tough times in Las Vegas and are projected to grow. Jonathan Rothwell, senior research analyst, Brookings Institute, citing a report his organization published last year called Export Nation, places Las Vegas’ share of tourism exports (or non-U.S. resident visitation) at 9.2 percent, behind New York, Los Angeles, Miami, Orlando and San Francisco. Las Vegas attracted 2.4 million visitors outside the country last year, an increase over 2009. Visitors from Korea, China and Brazil actually increased in 2008, one of the only sources of growth in that troubled year. Between the present and 2016, Brookings projects 28 million new visitors to the U.S., mostly from Canada and Mexico, but also Korea (over 2 million more) Brazil and China (each rising by more than 1.8 million).

Of course, increased competition will continue to accompany rising wealth levels around the world, so Las Vegas will have to continue to improve its product and hope to remain mostly on the right side of larger forces. “The opening of projects in Macau, Singapore and even the increase in projects in Canada and Mexico is something that people here should be concerned about,” said Aguero. “The ability to expand our tourism exports by attracting more visitors is more important now than at any time in the past decade. There’s an increase in the global population with the ability and desire to travel. In the immediate term, there’s a lot of concern over global financial instability and that we’re being helped out for the moment by a weak U.S. dollar.”

“International travelers are one of the three key market metrics we have identified as an area of potential growth for Las Vegas visitation,” said Rossi Ralenkotter, president/CEO, Las Vegas Convention and Visitors Authority “Along with special events and business travelers, we feel there is opportunity to expand international visitation in the next decade. We have set a goal to grow international market share from 18 percent to 30 percent of our overall visitation by the end of the decade. We have 12 offices around the world that market Las Vegas to more than 75 different countries in their own language. We also have a dedicated staff at the LVCVA committed to growing international visitation. It is a critical component in our growth strategy.”



Anchored by a London Millennium-style 550-foot, 28-cabin Ferris wheel, Linq will target the Gen X and Gen Y crowd with retail, dining, beverage and entertainment offerings. It is scheduled to open in 2013.

THE MISSING LINQ?

With no significant new resort projects coming online in the near future, development in Las Vegas is quieter than at any time since Mirage was built in the late 1980’s. That’s saying something, but things aren’t totally dark. The Linq, a $550 million retail, dining, entertainment and hospitality district located between Harrah’s and the Imperial Palace, will cover about 200,000 square feet of gross leasable area facing Caesars Palace.

Anchored by a London Millennium-style 550-foot, 28-cabin Ferris wheel, Linq will target the Gen X and Gen Y crowd with retail, dining, beverage and entertainment offerings. It is scheduled to open in 2013.

It’s harder to find critics than it is to find fans of Linq, which seems to be growing on the local cognoscenti.

“When I first heard of it, it was a big shrug to me,” said Curtis. “Then I took a look at some of the artist renderings and I started thinking about what they’re doing. They’re trying to infuse some energy in that area where they have all these surrounding casinos and what are they sacrificing? If anything, they’re sacrificing some of the IP and some of O’Shea’s. They’re just going to blend these things in and renovate them. They’re taking a pretty dingy part of the Strip and make it the newest coolest thing in Vegas. If they do it with the right bars and restaurants it should be a place that draws people in. If they have a club atmosphere and the bars are good enough, it should bring a new demographic in, and then they are going to be surrounded by the gaming product. At first I thought I don’t get it; it’s kind of a funky use of space but I’m gravitating toward it being a pretty good idea.”

For Aguero, Linq does something very important, which is bring something new to the table. “I certainly like the idea of trying to diversify the asset base,” he said. “There are some aspects I like more than others, but what we have realized more than anything else is only 39 percent along the LV Strip is sourced to gaming activity. This idea of giving people that next reason to come to Las Vegas is important. It truly is differentiated supply.”

Fine, who managed what he calls a similar attraction at the Stratosphere, which was well attended but never truly translated in a commercial sense to increase property revenue, isn’t buying.

“That Ferris wheel is a great example of seeing something in another place and thinking it will work in Las Vegas,” he said. “I worked with Carl Icahn at the Stratosphere and we had one million people a year visit the needle and we were never really able to integrate it. Everyone talks about London; there are two things that make the London wheel different. One, Las Vegas has no shortage of places where you can go up high and look at Las Vegas, including some that are owned by Caesars, like the Eiffel Tower. This is not a product that you can’t find. The London Eye actually created product that you couldn’t get anywhere else. There’s nothing else that’s tall in London, except for Big Ben, and you can’t get up there for whatever reason. Secondly, given its location, most of the time it’s going to be blocked by buildings. Again, in London, you have these amazing views the entire time. Even at the Stratosphere there are tall buildings that block the view. I think it’s going to be a big white elephant.”



“Look at Golden Gate. When you think of them you think, a little stodgy, downtown and the $1.99 shrimp cocktail. You would be amazed. In the evening, they have one of the most happening pits; go-go dancers in the pits who come down and deal the games."
Anthony Curtis, publisher, Huntington Press

DOWNTOWN REVIVAL

Linq could easily be considered a validation of the party atmosphere that has been successfully cultivated around town during the downturn, particularly Downtown, where The Golden Nugget, The Plaza (courtesy in part of The Fontainebleau’s never-used furniture), El Cortez and, most recently Golden Gate, have re-invested in their businesses.

Curtis said party pits keep popping up for a reason: They work. ”I talk to managers and bosses who tell me those pits do consistently good business,” he said. “They’re adding that little entertainment component to something that’s already entertaining. It also fits in with the theme of ‘sexy Vegas’ which has held up for quite a while now. The real proof is this is such a copy-cat city and you don’t see party pits drying up; you see new ones turning up all the time.

“Look at Golden Gate. When you think of them you think, a little stodgy, downtown and the $1.99 shrimp cocktail. You would be amazed. In the evening, they have one of the most happening pits; go-go dancers in the pits who come down and deal the games. Their entire casino has turned into a party pit from 7:00 pm on. It’s one of the best in town. They’re really trained these girls to deal well as well. If a place like that is going to embrace party pits, you know it has something going for it.”

Golden Gate recently announced a $12 million expansion that will add 14 suites plus two presidential suites that occupy the top floor of its five-story hotel tower. Co-owner Derek Stevens said there’s a lot of credit to go around when it comes to Downtown.

“The Fremont Street Experience is doing a great job; they had their third straight summer concert series, which brings a lot of people down on Saturday nights into a vibrant atmosphere,” he said. “For a lot of people, that’s either the first time they’ve been downtown or the first time in a while and they’re saying, wow, look at this. On the property side, things were really led by what Phil Fertitta did at the Nugget and then the Plaza. You have the underlying non-gaming aspect that is significant as well. The new City Hall opens up just a couple of blocks away in the second quarter of 2012, the new Smith Center for the Performing Arts opens up downtown, and that’s a significant investment. And shortly thereafter Zappos is going to move their headquarters in.”

Golden Gate’s customer mix is about two-thirds tourists from out-of-state, one-third in-state. “At night, we’ve definitely created a more vibrant atmosphere and the demographics have gotten substantially younger the last couple of years or so,” said Stevens. “Things stay pretty busy until 3:00 am and it’s definitely the younger demographic that plays into that. One of the things that helped up in the downturn, is none of the places downtown had $2 billion in debt. We can’t compete with $2 billion towers but, whenever there’s a downturn, you’re better off when you don’t have a lot of debt on your hands.”