Fitch Ratings recently released a study examining the potential of the Las Vegas Strip gaming marketplace to follow the same downward economic spiral as the Atlantic City-based casino industry.
Alex Bumazhny and Colin Mansfield, Fitch Ratings gaming analysts and authors of the report, considered this scenario unlikely for one primary reason—the Las Vegas Strip has had the foresight to broaden its appeal beyond gaming.
“The city’s main entertainment cluster, the Strip, has positioned itself over the decades as a coveted leisure and convention destination,” Bumazhny and Mansfield wrote. “In contrast, Atlantic City has been too complacent being a gambling center for those living within a two-hour driving radius.”
Indeed, as Bumazhny and Mansfield report, just a decade ago, the two cities were vying for number one gaming market status in terms of gaming revenues, with both markets generating around $5 billion each in annual gaming revenues. But while Atlantic City’s gaming revenues have declined by half over the past 10 years, the Las Vegas Strip has witnessed a 5 percent growth in revenue, in addition to food and beverage sales at larger resorts improving by 55 percent and RevPAR (the main operating metric for lodging) increasing by 21 percent. This, in turn, has led to a four-fold increase in Las Vegas room count since 1978.
“The primary reason is entrepreneurs such Sheldon Adelson, Steve Wynn and Kirk Kerkorian, who successfully tested the ‘build it and they will come’ mantra,” Bumazhny and Mansfield wrote. “Their visions culminated in a critical mass of ‘integrated’ resorts loaded with shopping, star chef restaurants, entertainment venues and convention venues.”
By 2005, Strip resorts generated 60 percent of their revenues from non-gaming sources, compared to Atlantic City, where non-gaming accounted for 20 percent of overall revenue. So when increased regional casino competition and the Recession hit, Atlantic City gaming operators were ill-prepared to survive the onslaught. But Las Vegas Strip operators, with their non-gaming bulwark, not only weathered regional casino expansion and economic downturn, they recovered quickly and appear poised for continued revenue growth.
“With the bulk of the ramp up in regional gaming competition now a thing of the past, Las Vegas can look towards a bright future,” the report said. “Regional gaming markets face an adverse demographic shift and a difficult fight for Millennials’ share of the wallet. The Strip is different and can make up for the Millennials’ tepidness towards gambling by attracting convention and club goers as well as international gamblers and leisure seekers. In fact, while 77 percent of Las Vegas Strip visitors gamble, 90 percent are there mainly for reasons besides gambling according Las Vegas Convention and Visitor Authority’s survey.
And some of these non-gaming “reasons” are starting to become quite complex. As noted by Bumazhny and Mansfield, Las Vegas continues to redefine its entertainment image, with corporations such as Caesars and MGM Resorts repurposing assets to fit Millennial tastes. For example, Caesars rebranded Bill’s Gamblin’ Saloon into a boutique hotel with a night and day club on the roof. MGM got rid of the legendary lions at MGM Grand to make room for Hakkasan, another giant club. In the last three years Las Vegas got The LINQ party district and Topgolf, a driving range equipped with bars and pools (see sidebar).
Meanwhile, a $2.3 billion convention expansion, a $450 million rebranding of Monte Carlo, an NFL stadium and two new major resorts are slated to open over the next several years.
Las Vegas’ transformation from casino hub to entertainment Mecca has not gone unnoticed by gaming operators elsewhere in the U.S. and around the world. For the most part, they agree more non-gaming amenities need to be integrated into the casino resort experience to both provide market differentiation and attract the next generation of consumer. Casino operators also realize that creating a true Las Vegas Strip resort outside the Las Vegas Strip is a very tall and risky task. So the question becomes, which bits and pieces of the Las Vegas non-gaming centric resort enterprise make the most operational and economic sense for regional wagering locations?
It is not an easy decision to make. When it comes to choosing non-gaming amenities for the modern casino resort, there are plenty options for operators to consider including golf courses, water parks, nightclubs and shopping malls. However, the most financially feasible and lucrative of all these non-casino choices are hotels and parking garages, according to a panel session entitled “Economic Diversification: Non-Gaming Amenities and Beyond” that took place at the recent Global Gaming Expo (G2E) in Las Vegas.
“From an investor perspective, the casino remains the economic engine of the resort property… it is the thing that has to be maximized,” said Kristi Jackson, chairman of TFA Capital Partners. “So with this perspective in mind, when you look at non-gaming amenities, a hotel should be at the top of the list since it can best provide incremental revenue for the casino.”
According to Jackson, a properly designed and sized hotel that is operated using a data-driven strategy can generate upwards of $200-$300 in incremental revenue from a customer per night. If this hotel also averages 90 percent occupancy, it can produce an ROI in just a few years; making it extremely attractive to investors.
“There is plenty to talk about when considering non-gaming resort amenities—where the property is located, what the competition has and what customers want,” Jackson said. “But what most investors want to see is a hotel.”
Rich Emery, president and design principal for Thalden Boyd Emery (TBE) Architects, concurred with Jackson’s observation about the value a hotel addition to an existing gaming resort, citing a study his firm recently conducted that examined the incremental gaming drop generated by certain non-gaming amenities. According to this study, hotels increased casino drop by 20-40 percent, in addition to the revenue created directly by the hotel.
The non-gaming amenities that produced the highest increased drop for a casino were, surprisingly, parking garages, which boosted drop by 74 percent. “Most operators will say they do not want to spend money on parking garages because the return on investment is not there,” Emery said. “This is not the case. A parking garage makes gaming more convenient to the consumer. It can take some of the worst weather days with rain, snow, sleet or extreme heat and make them profitable.”
And the amenity that generated the least when it came to casino drop? Golf courses, which produced a paltry 4 percent average uptick. “Everyone wants a golf course and sometimes it makes sense, but on average it does not,” Emery said.
“Golf, for many reasons, doesn’t tend to make sense for most resorts,” Jackson added, “one of the main reasons being we are pulling someone away from the casino—one of the most profitable areas of the property—for four to six hours. If that person has a finite amount of time they can stay at the property, and they spend all that time on the course, you are defiantly not getting the most you can out of them.”
Instead, the panel recommended lower-cost entertainment amenities that bring excitement and a different short-term amusement vibe to a property, such as bowling alleys, breweries, movie theaters and even shuffle board and beer pong. “These amenities are typically not very expensive to add, and create a lot of energy without taking someone away from the resort for long periods of time,” Jackson said.
“Topgolf and other third-party developers are taking traditional sports like golf and putting an entertainment twist to them that can suit casino amenity needs,” said Brad Friedmutter, architect and founder of Friedmutter Group. “A lot of these properties need to follow the Las Vegas local casino model, where enough amenities are offered that the facility becomes a gathering place for people, not necessarily just to gamble. The more often people come and the longer they hang out, the better it is for the bottom line.”
Tribal properties with lots of adjacent land to develop can consider larger-scale, standalone amenities such as outlet malls and water parks. But no matter the amenity choice, be warned: securing financing for these ventures can be difficult. “At the least, you will need a market study that supports the internal management team’s argument—that the amenity is missing from the marketplace, it is desired by customers and is needed to help balance the property and draw more revenue to the top line,” Jackson said.