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August 29, 2015

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Nongaming revenue a shaky leg for Strip to stand on

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Leila Navidi

A private terrace of a Cosmopolitan guest room offers a view of the Bellagio Fountains and other properties along The Strip.

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Nongambling attractions fueled Las Vegas’ rapid rise as a world-class resort and convention destination but are proving to be a double-edged sword in the Great Recession.

Business experts are cheering the latest increases in visitor volume, gambling revenue, convention attendance and even automobile traffic into Las Vegas. However, they also caution that a big part of the Las Vegas recovery story is tied to nongambling spending — an often overlooked indicator.

And although those figures appear to be rising as the economy improves, the gap between what visitors spent before and during the recession on nongambling attractions is much larger than it is for gambling, which depends less on the economy’s health, experts say.

The Strip’s reliance on nongambling revenue — which accounted for 61 percent of all revenue generated by Strip casinos in 2009 versus only 42 percent in 1990 — will likely make for a slow recovery in the years ahead, they say.

“It’s going to take more than gaming revenue coming back. It’s got to happen on the other side of the equation, too, and that’s not coming back anytime soon. People’s spending habits have changed for the foreseeable future,” said Gerald Gordon, a Las Vegas bankruptcy attorney who has been involved in most of the region’s Chapter 11 cases involving casinos.

Years ago, casinos broke even on nongambling amenities such as restaurants and shows, or operated them at a loss. For the past couple of decades, Strip amenities were built or upgraded to make money.

In the run-up to the recession, room rates, nightclub admissions and cocktail prices skyrocketed to meet demand for an unprecedented wave of luxury offerings.

During those go-go days, operators saw the biggest profit potential in luxury resorts rather than the middle market. Budget-seekers were long the primary customer base for Las Vegas after the early days when the mob catered to high rollers.

“The general consensus during (the boom years) was that the regional gaming providers would take care of the middle market and that we wanted the luxury customer whether they’re gamblers or not,” said John Restrepo, a Las Vegas economist and industry consultant. “We forgot that the middle market, Ma and Pa Kettle from Dubuque, was the basis of our business. I think there’s now this recognition that we can’t take for granted any market segment.”

Because of the continued need for new attractions to drive profit, the Strip — even with no new resorts on the horizon — will develop nongambling experiences to further diversify its offerings from other casino markets, Restrepo said.

But Strip watchers like Gordon say the nongambling business model is also partly to blame for the wave of bankruptcies and restructurings in Las Vegas.

Nongambling revenue on the Strip has plummeted more sharply than gambling in the downturn, disproportionately hurting Las Vegas more than other casino markets throughout the country.

Unfortunately for Las Vegas, casinos tapped cheap capital during the boom years based on overly bullish projections of what nongambling amenities, such as hotel rooms, could generate, Gordon said.

The upside from this growing revenue stream seemed infinite when times were good. And it’s a lot easier to increase profit by raising the price of a room or a steak by $5 than it is to manipulate odds on the gambling floor.

Gambling is similarly “priced” on the Strip in terms of odds, irrespective of the economy. With a few exceptions, published figures such as table limits have changed little in the downturn. And despite state figures showing that Nevada’s slot machines are somewhat tighter than they were several years ago, that’s largely a function of replacing old games with fancier slots that “hit” more often yet keep more wagers over the long haul. While casino operators often replace less profitable machines with ones that get played more and thus win more money for the casino, the “price” of a slot machine is less flexible than, say, that of a fancy cocktail.

Gordon says lofty pre-recession projections of nongambling revenue are so out of whack with today’s economy that they indicate poor judgment by some companies that took on large debts to fuel growth.

Area casino companies that filed Chapter 11 have reduced debts by 75 percent in bankruptcy, illustrating how badly the recession hurt the gaming industry. Those figures, he said, also reflect a new reality of diminished earnings.

To survive the downturn, Strip casinos are pricing hotel rooms low enough to draw visitors while maintaining relatively high prices for other amenities to support more expensive operations and the big loans that financed them.

Yet prices for many items besides hotel rooms on the Strip are still too high for many visitors, said I. Nelson Rose, an industry consultant and gaming law professor at Whittier Law School in California.

“Will there ever be as many people spending $16,000 for a leather jacket or $280 for a Cirque show? I would say, not as many. And that’s a real problem when gambling is not your primary source of income anymore.”

Rose blames the nation’s “jobless recovery” for the unwillingness to spend lavishly. Corporate profits are up along with the stock market, yet companies aren’t hiring and the employed remain insecure about their jobs, he said.

“People are buying those (miniature) bottles of booze at the gift shop rather than buying drinks. And when you reduce prices for rooms, you get people checking in with coolers of beer.”

Thus, the careful balancing act under way on the Strip: How to discount prices without going too far.

Hotels want to boost traffic without alienating the wealthier, more exclusive customers who began flocking to Las Vegas’ opulent resorts in recent years. And despite the rash of discounts, national advertising for Las Vegas is still careful not to discuss deals to avoid pigeonholing the Strip as a cheap vacation — and hopefully ease the process of raising prices as the economy recovers.

Las Vegas still has the “X” factor that attracts both Middle America and the rich and famous. But Strip resorts now have the tricky task of balancing the needs of the masses against the desires of that smaller, more coveted group of customers with more money to spend, said David Horne, president of VIP Travel Services, a New York agency with a wealthy clientele.

“People with a lot of money don’t want to see a bunch of schlock people in their hotel,” Horne said. “There’s got to be give and take.”

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