Room rates, 2009, and the future

Because we can’t wait for the future, everyone wants to know what’s going to happen. Spectrum Gaming has a 21-point list of what to expect, but I’ll give you my own views, focusing mostly on Las Vegas.

This is all with the caveat that, as I often say, “my work is not predictive.” That’s just a fancy way of saying I can’t tell the future, and a more polite one, too.

With energy prices and room rates down, I can see a rebound in business, but depressed room rates (relatively speaking) might reverse the steady trend of gaming revenue’s decline as a portion of total revenues.

That’s wordy–let me put it plainer: in 1984, Strip casinos made more than 58% of their total revenues from gaming. That number held fairly steady until 1994, when it began an unprecedented slide. In 1999, the figure dipped to 48.1% percent, and from 2005-7 it hovered between 40 and 41%.

With room rates down and consumers spending less freely on shows, expensive meals, that number may start to move in the other direction. If gaming revenues decline proportionally to room rates, we are in trouble. Year to year, they were down more than 14% in October, and occupancy was down more than 6%. That means a 20% total drop in room revenues. If gaming revenues fell by one-fifth for the year, the state’s budget would probably implode.

So, to borrow a phrase from Mr. Mom, somebody better figure out a way to get people gambling in Las Vegas pretty fast.

Slashing room rates and offering generous comps may do the trick, but what will the consequences be?

When analysts pencil out expected return on investment for future properties, they’ll note the trend of falling room rates. So builders won’t be able to borrow as much money to build higher-end rooms, since you can’t justify spending the same on a room that’s going to earn $110 a night as one that will pull down $160. The next wave of casinos might be a step down in terms of detailed finishes from what we’ve been seeing.

With casinos making more money, proportionally, there will be a greater drive to maximize revenues, which in the end will mean more labor-saving devices, fewer employees with their pesky wages and benefits, and, in the end, greater control over comps. It might be easier to give away a $90 room than a $250 one, but I think casino departments will have their feet held to the fire to maximize their revenues. In the long run, this might not be the same as optimizing them.

Since gas prices have fallen quicker than airlines have added capacity, I see a quicker rebound in drive-in traffic than fly-ins, which means generally stronger results for companies sensitive to value shoppers. The question is, once people have $250 a night to spend on a room, will they be willing to do so if they’ve just spent $90 a night? Or will they feel gouged?

While 2009 will see some great deals for people coming to Vegas, I think that everyone should be aware of the unexpected consequences of cheaper rooms. It may change the face of Vegas in ways that will please some, but not others.

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