Las Vegas casino operators seemed to be cruising earlier this year, but the summer has turned into a bit of a bummer for them. Whether this is a temporary decline or the start of a bigger reshaping remains to be seen, but there is no shortage of possible explanations for the season of discontent.
Last week’s round of earnings reports and conference calls were difficult for the big Las Vegas-based casino operators. Caesars Entertainment and MGM Resorts International, which each own multiple properties on the Las Vegas Strip, both reported soft numbers for the second quarter and predicted more headwinds in the third quarter.
Operators reported declines in RevPAR, or revenue per available room, which is the most commonly-used metric to assess how profitable Las Vegas casinos are. Overall, Strip RevPAR was down four percent. Through June, both overall visitation to Las Vegas and room occupancy are down about one percent. Convention attendance is down by about three percent, which is particularly worrying to Strip operators since convention guests, though they don’t gamble as much as other visitors, spend significantly more on rooms and dining (someone has to buy those $9.50 Brazilian coconut shrimp).
Wall Street greeted the news of the Strip’s struggles with concern, as casino stocks fell by as much as 24 percent. There are fears that Las Vegas has finally pushed its luck too far. For nearly all Americans, there are now places to gamble that are much closer than Las Vegas, which is why the city’s resorts have reinvented themselves as places to eat, drink, shop, and occasionally gamble. The industry—and shareholders—have made peace with gaming being a smaller piece of the pie in post-monopoly Vegas. But the recent news that both visitation and earnings are down has thrown a scare into investors.
Many observers have been quick to blame the increased resort fees, paid parking, worse game odds, and other “nickel and dime” tactics that have become common on the Strip. While each factor increased revenue in the short-term, it is possible that these incremental charges and inconveniences have eroded the value proposition of a Las Vegas vacation for many people who have loved visiting the city. While it is hard to gauge just how big an impact individual fees have on people, it is difficult to imagine a universe in which these factors attract people. So while we don’t know how much those nickels and dime-grabbers hurt, it’s certain that they haven’t helped.
There is also a geopolitical dimension to the downturn. International visitors, who similar to convention guests tend to spend more and are therefore highly coveted by resort operators, have declined in number nationally, bucking a worldwide uptick in travel. Specific to Las Vegas, there are jitters about the impact of a potential Sino-American trade war, since a large percentage of ultra-high rollers come from China. But the flow of gambling dollars from the People’s Republic has been curtailed since a 2013 corruption crackdown that drove down gaming win both in Macau and Las Vegas. An all-out economic confrontation with China would likely cut into both high-end and mass-market tourism to Las Vegas from China, undercutting years of efforts to market Las Vegas to the rising Chinese middle class.
But while the near future is far from certain, it is too early to write off Las Vegas yet. The Las Vegas hospitality industry has weathered slumps before. Each crisis in the city’s history has forced resort operators to pivot their offerings and appeal. Back in 1955, an oversupply of new casinos led to a string of bankruptcies and deep concerns that the city had overbuilt; that shock spurred the construction of the Las Vegas Convention Center and a broader shift to business travelers who would bolster mid-week occupancy.
Similarly, the late 1970s/early 1980s recession saw casinos pull back on their offerings to high rollers and shift focus to middle-market gamblers. When Circus Circus’s new RV park delivered more reliable returns than Caesars Palace’s new high roller suites, many casinos began courting low-rolling players who brought their kids; this was the genesis of the family-friendly trend that culminated in the 1990s’ theme parks and pirate battles.
The post-9/11, post-dot-com bubble downturn led to a move away from family friendliness, epitomized by the era-defining “what happens here, stays here” advertising campaign. Arcades were out, nightclubs were in. The Great Recession led to sharp declines in almost every metric casinos count, which spurred a shift towards high-end international gamblers—mostly Chinese baccarat players. Since that lucrative revenue stream slowed, casinos have focused more on new entertainment and restaurant offerings. The T-Mobile Arena is only the biggest new venue, and its tenants the Golden Knights the most visible face of this new Vegas. Indeed, resort operators were quick to point out a decline in the number of marquee events at the arena as one reason for less demand on the Strip.
But if the slipping numbers are more than a blip, and are a sign of a broader problem, as was the case in 1955, 1980, 2001, and 2009, a more strategic shift in focus for Strip resorts might be on the way. While it will take time to see just where the trend is heading, there are already concerns—perhaps justified, perhaps not—that Las Vegas is in for a rough patch.
What makes this summer’s softness a surprise is that it bucks historical trends. In the past, lower unemployment and higher consumer confidence have translated into higher earnings for Las Vegas casinos. Nationally, unemployment has fallen to 3.9 percent, and consumer confidence is as high as it has been since the Recession. On paper, Las Vegas should be booming, but this summer has been a difficult one.
Casino operators have already begun to respond to the slowdown. Both Caesars and MGM have lowered room rates. Wynn Resorts started validating its parking. In conference calls to the investment community, executives have cautioned that the next few months will be volatile, but reaffirmed their faith in the many investments that have transformed the Strip over the past few years. Still, lowering room rates is evidence that there are real worries about keeping hotels full.
History shows that Las Vegas has faced adversity before, rebuilding itself on the fly to adapt to new conditions, ending up more profitable than before. There’s no reason to believe that this won’t be the case in 2018. Things have looked more dire in Las Vegas before, and the city has not only survived, but become more appealing. If operators listen to their customers and learn from this summer’s discontent, they have an opportunity to create a foundation for lasting growth.
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VanEck Vectors Gaming ETF <BJK> (weekly) downside break of ascending diagonal support. This technical break is a warning…
Notice the massive divergence forming in casino stocks versus S&P500?
