As Strip scales up, some say goodbye

Higher prices, tighter comps repel low rollers

Leila Navidi

Elton’s helps make the Palazzo a mecca for high-end shoppers.

Fri, Aug 8, 2008 (2 a.m.)

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Trey Rusk used to travel to Las Vegas four times a year to play the slots. That was until about two years ago, when he and his wife decided that the city was no longer their kind of scene.

The realization came one night at the Rio, when Rusk couldn’t find a waitress and had to navigate a throng of scantily clad clubgoers to get a Bud Light. After seeing Rusk’s player’s card, the barman charged him $5 for the beer.

“We left the next day and we haven’t come back to Las Vegas since,” said Rusk, 53, a police officer from Houston, Texas.

The Rusks now travel to Laughlin, Reno and Lake Tahoe.

“They cater to gamblers in our age group,” he said. “When we get off the bus from the airport, they meet us and hand us a coupon book. And, if you ask, they will usually give you a comp.”

Hundreds of tourists have similar stories about how they have soured on Las Vegas. And it’s not just about the money. Many are middle-aged people who aren’t comfortable in the ultra-hip nightclubs, lounges and restaurants that appeal to younger, style-conscious consumers.

Rather than cheering the slew of upscale resorts including CityCenter, Fontainebleau and the Cosmopolitan now under construction, these tourists-turned-critics bemoan a future without comped buffets and $9.99 prime rib.

With consumers pinched by the mortgage crisis and higher fuel prices, many visitors are wondering whether the Strip’s rapid transformation into a playground for spendthrift hipsters was a smart idea. Some are taking pleasure in the recent decline in profits on the Strip, saying resorts, having abandoned middle-class gamblers, are suffering a backlash after greedily inflating prices on rooms, food and drink.

But the developers who decided to go upscale didn’t do it to spurn middle-class gamblers. It came down to simple math.

With land on the Strip going for more than $20 million per acre, developers are forced to build the kind of properties that can charge $300 for a room and $100 for dinner to make a profit, analysts say.

There’s enough consumer demand to warrant building midlevel casinos for middle-class customers, said Bill Lerner, a stock analyst with Deutsche Bank. But the numbers don’t pencil out — even though some developers, given the choice, would probably choose to cater to the mass market.

“It’s a math problem,” Lerner said.

Not that luxury properties mean easy money. Profits are harder for everyone to come by these days and will be more difficult for the resorts under construction — the most expensive, and perhaps the most opulent, in Las Vegas history.

So far, the strategy appears to be working. MGM Mirage reported this week that its high-end resorts are holding up better during the downturn than the company’s low-end properties.

Although Strip casinos are maintaining high profit margins during the downturn — 30 percent or more for some companies — they aren’t making as much after the total cost of the project is factored in. Returns on invested capital, which includes land and development costs, are much lower than they were in the 1990s. For most of that decade, returns were in the 20 percent to 30 percent range. Today, casinos are lucky to earn 15 percent returns. And such returns are now unrealistic in light of the new resorts that will open in 2010 and 2011, Deutsche Bank says, which is forecasting returns closer to 12 percent.

These are abstract figures for folks like the Rusks, who grew accustomed to frequent comps in Las Vegas until they were told that their level of play didn’t warrant them.

An easier way to think about this is that the Strip, because of rampant land speculation in recent years, has become like New York’s Fifth Avenue. No developer would build a JCPenney on Fifth Avenue, where there are instead Gucci and Prada boutiques.

Same with Strip casinos, which have to be creative to earn their 12 percent. Resorts are selling penthouse condos for more than $1,000 per square foot — money that helps finance the projects but is beyond the reach of the fanny-pack crowd. To lure the big spenders, restaurants and bars can’t just look nice. They must be crafted by name-brand designers and feature menus by culinary stars.

The more upscale the product, the higher the profit margin.

Age plays into the equation as well. Even casino executives have been surprised by the willingness of customers, especially those in their 20s, to spend exorbitant amounts on meals and drinks.

MGM Mirage, the Strip’s largest operator, is pumping hundreds of millions into some of its older casinos, such as the Luxor, to make them more competitive (read: upscale and fashionable). A similar transformation at the Mirage significantly boosted the company’s profits there.

(The company says it’s not abandoning longtime, mid-roller gamblers and recently discussed upgrading its loyalty card program to offer more perks. Whether the Rusks would qualify is an open question.)

Dennis Gomes, a casino executive who used to run the Tropicana casinos in Atlantic City and Las Vegas, says the business now demands fewer comps and more expensive venues.

“You can’t give away as much as you used to. That’s a business model that doesn’t work anymore,” Gomes said. “It’s not only more expensive for customers, it’s more expensive for developers. The cost of entry is too expensive.”

So the transformation will continue, even during the economic downturn. The luxury gap between Las Vegas and other destinations that compete with the city, such as San Diego and Orlando, will grow. And cruise lines will continue to pick up the midmarket business that Las Vegas began losing even before the decline.

There might be a silver lining for budget-conscious tourists.

While luxury properties duke it out for customers, the few remaining midmarket properties on the Strip will find it’s advantageous to maintain a niche catering to the middle class, Lerner said. Harrah’s Entertainment, which owns several mid-roller properties near the center Strip, could profit by maintaining its casinos rather than tearing them down and going the way of Fifth Avenue, he said.

“There’s a piece of business that’s being missed that doesn’t want to pay $300 a night for a room.”

And, the Rusk family hasn’t entirely abandoned Las Vegas. The couple’s daughter likes coming here. She thinks the night clubs are cool. And she probably wouldn’t mind paying $5 for a beer.

Discussion: 18 comments so far…

By bill_sandi

8/8/08 at 9:08 a.m.

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When we first moved here in the 60's, part of the charm of the place was the mixture of tuxedos and shorts. The city was for everybody and you could find or do most anything you could think of. Making it 'exclusive' for either type would not be good for Las Vegas. The casinos will always adjust to their market.
By maybevegas

8/8/08 at 9:48 a.m.

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The notion that resorts have to be high-end based on land values doesn't make sense. The only resort built recently on newly purchased land was Cosmopolitan (oops, in foreclosure). Steve Wynn bought his land (1999), Bellagio (19??), Venetian (19??), Echelon (19??), PH (Aladdin-19??-still foreclosed). Those luxurious projects were built prior to the runup in land prices. The new projects are being financed on inflated land values, kind of like the housing market. We were running out of land and couldn't build fast enough.
So, luxury resorts got built based on land prices and perceived demand. The Plaza will sit for years and most likely get built at least 3+ years or the land will be sold at a discount.
If you build it they will come, but they won't pay $300 a night. So, those analyst's who say that it only pencils at $300 a night, can either be foreclosed on or reduce room rates to fill the place up under a less profitable model. You do not create demand by building, especially when the cost of flying will not go down, due to routes being cut, etc.
Even if gas prices fall, the airlines are showing they can't stay as big as they are, which means consolidation, which drives down supply and prices go up. The casino's are working on the opposite model, create supply and demand grows? Going from 120,000 rooms to 170,000 isn't that much of a problem, except the 50,000 rooms need to get $300 a night cuz somebody said there was a demand? Do I hear Hummer's going out of business and the Big Three (and Toyota/Nissan) have to rethink their profit margins on full size trucks? The paradigm's shifted, upscale Vegas will still thrive, but not at the levels anticipated...
By KDR81

8/8/08 at 10:15 a.m.

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No, upscale Vegas will thrive and a low-scale Vegas will grow some place else...like the burbs.
By OG

8/8/08 at 11:25 a.m.

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The next shoe to drop is folks from Utah deciding they have enough of Las Vegas' greed. After California, Utah is the next largest driving market for Vegas.

But at 4.00 a gallong gas, $200+ strip hotels rooms, and record lows on slot "holdings" (i.e. payouts), why would anyone (except the very wealthy) decide to go to Vegas when they could go to Wendover, Reno, Mesquite, or Laughlin.

I have always loved Vegas - but it is time for consumers to take a stand!
By RDesnomie

8/8/08 at 12:11 p.m.

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My wife and I used to be regular visitors to Vegas since we were married there in 2003. However, we have found that the room deals we could get as little as three years ago have all but since disappeared.

Traveling to and from Vegas from Regina, CAN is not cheap. Flights alone cost the better part of $2,000, and then once you get to Vegas there's transportation, food, gambling, etc. When we could get a room at Bally's for $69/night, money wasn't as much of an issue. But now to pay over $120/night ... no thanks.

Coincidentally, other people we know who used to travel to Vegas have since stopped for this very reason. Cruises have now become popular among many of this crowd.

It's little wonder these Vegas resorts are taking a financial hit. And until hotel management/owners wake up to the realization that their high room rates and lack of freebies are driving business to other vacation options, I'll be happy to sit back and watch them lose more money from up here in Canada.
By goingbust

8/8/08 at 12:32 p.m.

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I like Vegas. It pays to shop. You can still stay at TI for $100 a night if you plan it out. Of course the buffet is overpriced and drinks cost $6, but you don't have to buy there. Get out of the damn hotel. TI wants you to spend every dollar there, but at the prices they charge for incidentals, it makes more sense to sleep there and spend your money elsewhere.
By asylum23

8/8/08 at 3:32 p.m.

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I live in Vegas and can agree w/ this high priced/over priced strip stuff. We only ever go to the Strip when out of town guests come, and then it's to a place such as the Harley Davidson Cafe, which is also supposed to be torn down for some crap large resort we do not need more of.

For lower priced rooms, I recommend the Orleans. They constantly run specials of prices such as $29 per night, and have free transportation to the strip. Get their player's club card, also the Station and Palms cards, we get lots of deals in the mail each month. We can not use the rooms, but do use the buy 1 get 1 free buffets, meals and drinks.

Locals sign up for http://showtickets4locals.com/. They do numerous shows each day that are free for locals, plus a guest. We have seen Danny Gans and some others, didn't pay a dime.
By firedawg2000

8/8/08 at 4:40 p.m.

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I strongly suggest rediscovering downtown Fremont st. They have made a lot of improvements over the past few years and have done a great job. The Golden Nugget is completely renovated and looks great! It's a very festive mood there complete with live bands, street artist, and vendors. Very good restaurants too. Not to mention you'll basically pay 50% less then what you pay on the strip. You will find $1 tables and slots are a lot looser there too!
By wilson

8/9/08 at 6 a.m.

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Vegas seems to cater to Vegas, always looking for the next big thing to make a bigger buck. The KINGS/resort owners of Vegas do not really seem to care that you feel it is not what it once was. GANG BANGERS RULE VEGAS that is true.
When gang bangers are not strong arm robbing you? Casino's are!
http://nevadacorruptions.proboards83.com...

For unsolved MURDERS OF YOUNG WOMEN go to ( http://noelwaters.blogspot.com )
By PatriciaLV

8/9/08 at 6:29 a.m.

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I totally agree with firedawg; Downtown is one of the best places to go if you're coming here. It's always a party, it's always affordable, and the improvements that have been and are being made just make it better and better and better. The renovations that were made at the Golden Nugget are terrific! But you still have the old stand-bys: Binion's, Four Queens, Fitzgerald's and lest we forget the El Cortez :)

Besides, there's NOTHING like "Old Vegas" especially when supplemented with several shots of "New Vegas".
By PatriciaLV

8/9/08 at 6:36 a.m.

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wilson:

Not entirely sure of the point of your post; do you live here? (Yes, it matters.) "The KINGS/resort owners" aren't the only "owners" in town and while the rest of that statement rings all-too-true ("do not really seem to care that you feel it is not what it once was") it seems a bit sweeping to simply throw it out there and then not comment further.

As to the gangs, well, yes, LA very kindly donated some of their gang members to us. I suppose we forgot to thank them for that. (Thank you, LA.)

As to "unsolved MURDERS OF YOUNG WOMEN", it has NOTHING to do with the subject of this thread. I would suggest you find a more appropriate thread for that information.
By jldour

8/9/08 at 2:58 p.m.

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OG is exactly correct. We live in Utah, about a six hour drive from Las Vegas. We used to go to Vegas a couple of times a year. Now we go to Mesquite or Wendover. Vegas is over priced, too tight and over rated.
By extremebridge

8/9/08 at 6:29 p.m.

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I am from Indiana and we have several local new casinos that are starting to look like Las Vegas. With new airline first bag baggage fees, charge for a bottle water, higher airline prices, 5 (30 minutes) mile ride to get to mini Rent A Car mega mall- las vegas, 10 minute ride on in-airport tram. I think I my odds are better at local casinos and none of the hassles of Las Vegas Mega International Airport- You use to get off plane and be at rental car counter in minutes - now it is like two hour deal! Save your money and gamble locally and support your own state until Vegas realizes it is losing people that way it treats low rollers! Heck its growth won't be due to homeless in Vegas but from the Airport and it does a terrible way of treating its customer! Wake up Vegas and Casino Execs- you are losing us!
By extremebridge

8/9/08 at 6:31 p.m.

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New Las Vegas Airport - Rent A Car center is like 5 miles away and is a hassle!
By gmkhawaii

8/10/08 at 8:17 p.m.

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I know that you can still find bargains in Vegas but its not as it were a few years ago. My wife and I come there about 3-4 times a year and usually stay at Harrahs or Imperial because of the PRICE and great location. Sometimes we we able to stay at TI, Mirage, Luxor, Paris, Planet H. but unfortunately because of BILLION(S) dollar projects its pretty nearly impossible to afford an upper scale place anymore. The most annoying thing though is that it REALLY seems that if you are at a table game and have a winning streak going the pit crew(not dealers) really seem to be offended. that is very unfortunate since the house ALWAYS win in the end! it makes you feel very unwelcomed! if you lose money it thanks for playing see you next time!!hahaha......
By kevhere

8/11/08 at 2 p.m.

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We started staying at Station properties about 5 yrs. ago and have'nt looked back. The Red Rock Hotel/Casino/Spa is a fantastic place and we can (with play history)stay for under $100/night in rooms that feel like $250+. You can also find good, affordable food at Station properties all over the valley. As for the 20 somethings crowd on the strip? Who needs the hassle? The majority of them are simply "in the way"! Virtually anything you try and do on the strip these days you will find these clueless crowds "In the way"
By gqbossing

8/12/08 at 11:32 a.m.

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Ditto on the posts about there still being value here. People just have to give up the idea they are going to be able to stay at a 4star and 5star resorts for 1star prices. It's supply and demand and there is a demand for the high end.

My suggestions for going on the skinny:
On strip:
Hooters, Imperial Palace, Casino Royale, Excalibur, Alexis Park, Palace Station, Wild Wild West, and Tropicana. You can stay here depending on the season for less than $80 a night on a weekend and $30 a night range on weeknights.

Downtown, Station Casinos or other local casinos

If you want to drink on the skinny:
Casino Royale (right next to the venetian) has $1 Michelobs and margaritas and i think the most expensive drink on their menu is $3.
Oshea's which is right across the street from Caesars has $2-$4 drinks, Bill's (Barbary Coast) has $2-$5 drinks and $14.95 prime rib specials.
Ellis Island on Koval just south of Flamingo has $1 22oz beers and $2.50-3.50 drinks for everything else; and some of the best food for under $10 you've ever seen.

Bottom line is people want to complain they cannot get into a swanky place for peanuts anymore, when they never should have been able to get in there in the first place. There are many places ON THE STRIP which will rate your play on penny slots and $5 at table games...
By BorisR

8/18/08 at 3:51 a.m.

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I started hatinng the Strip quite some time ago. For many years I haven't stayed there, for many reason:

- bad air on the STRIP, due to high traffic , pollution at its finest
- overpriced restaurants and buffets that do no longer meet my expectations
- masses of walkers in the casinos, without actually playing much (what a waste of time!!!)
- oftentimes difficult parking conditions, even if you use the VALET (long wait on pick-up)
- Swimming Pools packed and not-so-nice than at other properties

Then I found places such as the Gold Coast, Orleans, Santa Fe Station, Sunset Station, having all that it takes to be happy, at much lower costs. I figured that even if I rent a car for the time being in Vegas, I will still come out ahead and have a much higher vacation quality. And if I like to go and play Poker on the Strip, it's a nice ride into the center action, without the need to pay deerly for the overcharged standard rooms and the standard buffets at high end costs.