Inside Asian Gaming

INSIDE ASIAN GAMING | March 2009 42 Market Outlook Back to Basics Recession-proof no more, the casino industry is having to adjust... cutting costs, in most cases, but in others, looking to spend I f gambling is entertainment, where does it fall in the pecking order of consumer priorities? Is it before or after a new flat- screen TV? In tough times, where do cash- strapped managers—or, these days, CFOs— target their marketing? What if the decision comes down to a few dozen of the latest slots versus a refurbished buffet? As casino executives wade through what looks to be a sustained and ravaging recession, most are faced with an environment they have never lived through. High-end Las Vegas Strip properties are nervously dealing with mounting vacancy rates and slashed room rates. Once-a-week customers at smaller, locals-based gaming halls are becoming once-a-month visitors. The rivers of cash flowing through tribal casinos across the United States have slowed to stream levels. From card rooms to small slots houses to megaresorts, from California to Connecticut, the gaming industry, once thought to be “recession-proof” is showing itself to be what it has long sought to be—on an even playing field with the rest of the American economy. “I think it’s pretty safe to say that the old adage that gaming is recession-resistant has been blown out of the water,” said Robert LaFleur, an industry analyst with Susquehanna Financial Group.“On a broader scale, there’s the whole psychological issue of, for lack of a better term, the post- prosperity society, where we went through these multiple years of excess, and now we’re in a much more austere time where it’s all about paying down debt and personal deleveraging and simplifying lifestyles.” Bill Eadington, director of the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada, Reno, agrees. “The problem with this recession is that it is very extensive,” he said. “It has effects on every social class—whether it’s your 401(k) or the mortgage or you’re afraid of losing your job, or all of the above.” It’s becoming a familiar sentiment. “The striking thing about the seemingly endless collapse of the subprime-mortgage market is how egalitarian it has been.” That is the first sentence of the introduction to “Panic! The Story of Modern Financial Insanity,” edited by Michael Lewis, best-selling author of “Liar’s Poker” and other books, published last month. The fact that two well-known gaming experts, one in finance and one in academia, are discussing casinowoes in the same terms as those of the national economy shows just how far the industry has evolved into the mainstream. “It remains to be seen how weak the economy’s going to get,” LaFleur said. “The risk is that things like Las Vegas seem frivolous and decadent.” The evidence for that has been overwhelming. For November 2008 (the latest figures available at press time from the Nevada Gaming Control Board), winnings at the 41 Strip casinos fell to a five-year low, down 16.2 percent from November 2007. The numbers are worse than they appear, though, given that the gross win for November 2007 was down 19.2 percent from November 2006. For all of Nevada, November’s win was down almost 15 percent from the year before. Publicly traded gaming companies have been through the wringer for more than a year. Stock prices for the likes of MGM Mirage, Las Vegas Sands, Boyd Gaming and others have nosedived into the single digits from two-year highs ranging from $50 to $100 a share. “Obviously the cash flow line ... of these companies has been hit harder because of the negative leverage associated with the somewhat fixed-cost business,” said Andrew Zarnett, an analyst for Deutsche Bank in New York. Was there a lingering notion among gaming companies, public and private, that the business was recession-proof, or did they just take advantage of lax credit markets like everyone else? “I think it was both,” Zarnett said. “There was clearly a view that these businesses weren’t recessionary.” That failure to account for the possibility of a major recession, along with too much capital spent on “oversized assets” means that debt—with a “significantly below- market cost of capital”—is the only asset that remains for publicly traded gaming companies, Zarnett wrote in a recent report: “Over the past three years, Las Vegas operatorshavespentover$6billioninvesting