From Pandemic To Prosperity

November 2020 seems like a long time ago.

?Much of the world was still reeling from a global pandemic, there was no sign of a vaccine, the hospitals were full, and the death rates were rising daily.?

For those of us in Las Vegas, the concerns were more pronounced as this city thrives on human interactions in highly concentrated environments. Will people come here again? When? How will our city evolve to meet the COVID challenge.

On a personal level, was my move from London to Las Vegas a gamble too far?

The Pandemic Problem

Between June and September 2020, with little else to do, a group of us consultants, academics and researchers met virtually to look at the historical context. Months before a single vaccine was delivered, we asked over 1,000 visitors under what scenarios or conditions would they return to their past behaviors to understand how, or indeed, if Las Vegas would recover.

?Travel had collapsed, conventions had been cancelled and international visitors were locked out. We found that 29% of visitors believed that Las Vegas resorts were not safe to visit until there was a vaccine, but half ofcustomers would continue their past activities with only a moderate variation of behavior, such as wearing a mask.

We concluded that Las Vegas casinos could not operate “business as usual” until further notice.

We reviewed the history of Las Vegas, defined the business problem and proposed a pathway to recovery. The pause in the operations heavy environment allowed Executives to assess the market in general, review strategies, and usher in a new wave in thinking about the future of Las Vegas and managing the casino industry.

The Business Transition

In October 2023, Ed Pitoniak (CEO VICI), Bill Hornbuckle (CEO MGM) and Christina Binkley (WSJ Journalist) spoke on a panel at the Economic Club of Las Vegas, titled “Transformation in the Casino Industry (below). The panel discussed the maturity of the city and how the casino industry had changed over the past decade.

Perhaps the most pronounced shift in corporate structure in gaming in recent years has been the separation of real estate from operating businesses, where many of the major casino companies sold their property to Real Estate Investment Trusts on a sale and leaseback basis.

Operators pay rent to the REIT, and the arbitrage between rent received and debt interest paid is returned to investors.

?Widely seen in other sectors, the economic rationale for this is evident.

?Firstly, the tax treatment of a REIT versus a traditional corporation is advantageous, secondly this has allowed cash generated to the gaming companies that was tied up in fixed assets or high-interest development finance or bonds, releasing equity for shareholders and to fund future developments, other business needs (such as online expansion). Finally, this new structure has allowed the casino operators to focus on their core competencies, primarily operations.

?To build a new casino resort in Las Vegas will range between, $500,000-$1.2m per key depending on positioning – so for a 3,000-room resort, that equates to $1.5bn to $3.6bn. Typically, REITS can borrow for real estate on cheaper terms than traditional casino operators with irregular cashflows. Park MGM, the former Monte Carlo, owned by VICI and operated my MGM saw a full renovation and repositioning for $500m. The reinstatement value would be over 3 times that.

?Moreover, with institutional investment comes the need for institutional responsibility – the nation’s pension funds now own the casino business.

?The Operating Transition

For decades, Las Vegas has declared itself as the “Entertainment Capital of The World”. Maybe it was, maybe it wasn’t, but Pitoniak clearly believes “Las Vegas is the world capital of perishable inventory.”

At time of writing, there are more hotel guestrooms in Las Vegas than any other city on the planet, and there is more seating for live entertainment than there are beds. ?What beds and tickets have in common is that if they not sold in time for use, they have no recoverable value. During the pandemic, this posed a potentially terminal problem.

The challenge of selling 155,000 rooms and 230,000 seats of perishable inventory in the middle of a desert, is met by creating time-limited experiences, valuable enough to make customers get on a plane, or drive to this once remote outpost.

?In planning their broader businesses objectives, the factors that the operators have to consider is space and time, that is, they have to manage their physical environments and customer time to best maximize revenues – if done correctly this will engender loyalty and lead to a higher customer lifetime value, with the outcome of a sustainable, profitable business.

?Moreover, with the proliferation of both regional land-based casinos and online gaming – whether sports betting or indeed online casinos - gambling in Las Vegas, the once dominant primary rationale for a core customer’s visitation, has been greatly diminished.

?Thus, the resort operators continued investment to drive visitation and diversification in revenues throughout the enterprise, whether in entertainment, conventions, tournaments, dining, sports or nightlife by creating these experiences,

According to Pitoniak, Las Vegas’ resort operators have been spectacular in driving occupancy and avoiding perishable inventory for decades. Back in the 1990s, it was easy to fill beds, observed Hornbuckle, as demand exceeded supply, but with travel and visitation systemically down during the pandemic, leadership had to review the business model and think creatively.

Unlike past generations, the human resources that Las Vegas’ operators could now deploy were deeper and different.

?When Gary Loveman took over Harrah’s, he implemented an MBA graduate recruitment program and hired extensively from outside the industry.

In the late 1990s, working for a “casino” company was not seen as a desirable career for an ambitious business graduate. Today, most casinos have direct hiring from MBA programs and MGM is one of the top business school graduate companies for applications. The MBA “propellor heads” that Binkley had written about so fondly in her book, “Winner Takes All”, are now in senior positions throughout the industry. They prize data, analysis and smart decision-making, where it isn’t all just about driving revenues in the casino pit and playing poker in the evenings.

During the pandemic, having this cadre of multi-dimensional thinking was put to good use.

The Transformation

The economic and safety crises of the early 1980s, with older buildings and the new competition from Atlantic City, led Las Vegas to reposition as a value offering.

We cautioned against this in our research, as Las Vegas needed to retain the hard-won reputation as a high-value, quality, experiential destination. We observed, “inevitably the race to be the “cheapest” leads to the diminution of the value proposition, reduce margins and accelerate the journey to property obsolescence.”

Among our research recommendations to operators were to focus on new events and experiences that would appeal to customers that were prepared to come to Las Vegas, in particular Gen X, Millennial and younger visitors. When borders reopen, seek to attract international visitation, who stay for longer and typically spend more.

This was based on the historical case studies; the catalysts for Las Vegas’ reinvention each success period is defined by a unique entertainment offering that captures the imagination of customers. This is illustrated by Liberace and The Rat Pack, to Elvis Presley, followed by Siegfried and Roy, Cirque du Soleil, Celine Dion and Britney Spears, each became a must-see global attraction.

Today, Las Vegas has two new iconic drivers for visitation; sports and The Sphere.

In this time of great division, one of the few unifying factors in American society, notes Hornbuckle, is the love of sports. In only three short years, Las Vegas has become a major sporting destination, for both local fans coming to the traditionally tourist corridor on a regular basis, but also in enticing visiting teams’ fans to come to the city. But their trip is not just for one day, it is typically extended for several, with associated spend on other amenities and entertainment.

Moreover, sporting tourism has proved significantly more robust in times of economic uncertainty; tribal loyalties to sporting teams are more elastic than business travel and leisure visitation.

The Las Vegas Sphere is undeniably a global icon, just weeks after opening. It is probably the best live music venue in the world, with several of Las Vegas’ other venues also in that conversation.

The Allegiant Stadium, that opened during the pandemic, was the highest grossing venue on earth, in 2022.

?Las Vegas Transformed

Looking at 2013, 2019, the last full year before Covid, and the mid-year analysis of 2023, we can understand how the customer spending patterns have evolved.

?We observe that gaming budgets have increased over the decade (gaming revenues totaled $8.3bn on Las Vegas Strip in 2023, up from $6.5bn in 2019) but it is in the non-gaming spend that has seen the greater increases.

Average food and beverage spend has doubled in the decade, shopping nearly trebled, but the move to a sports, entertainment and events destination has seen visitor spend on tickets increase by over 600% to $270 per visitor. Even in the pre- to post pandemic period, spend on entertainment has increased by nearly 150%. There is a greater appetite – and budget- for the experiences that matter the most.

The opening of the Cosmopolitan in 2010 marked a demographic shift of younger visitors, which has sustained.

It is notable that during this period, 2021 and 2022, at the height of the pandemic, the percentage of visitors under 40 was 46% and 53% respectively, with the mean age in 2022, 40.7 years. We note (as our research suggested) that the older visitors are returning, but younger visitation has remained engaged.

The decisions made in recent years have had resonance with the next generation of customers and fears that customers would “age-out” of Las Vegas have proved unfounded.

Prosperity Awaits

?Since the advent of the pandemic, Las Vegas has seen Resorts World and Circa open. The Hard Rock is now Virgin and Mirage operated by Hard Rock’s owners, The Seminole Tribe. The Palms also has Tribal ownership by San Manuel, Dreamscapes recently assumed operations of the Rio, Station’s Durango is to open for the locals market, and the much anticipated Fontainebleau is poised to compete at the highest level in hospitality. Other tribal, regional and individual operators are considering market entry.

Formula 1, The Super Bowl and Oakland Athletics’ baseball relocation will augment the calendar, plus every “A-List” entertainer is rumored to grace the city with a residency, without a shred of irony or accusations of being past their prime.

This is the beginning of Las Vegas’ new age.

The decisions made in the preceding years to the pandemic led to structural efficiencies and the release of capital to be reinvested in improving an already world class infrastructure, matched by decades of human investment, has allowed for success in meeting the pandemic’s challenges.

This resulted in operating flexibility and strategic clarity, which was implemented expeditiously.

?The outcome is both a new offering that is embraced by a range of segmented customers, but as importantly, a mature, confident leadership class, possessing a commercial mindset, proven success in implementing rapid change, and with the collective experience successfully managing both physical space and customer time, through a crisis and successful transition.

For Las Vegas, the path to prosperity is clear.

?Within a generation, and if the correct decisions are made, Las Vegas could be in consideration to be one of America’s most significant and important cities, where business, sports, hospitality and industry all combine.

Post-pandemic, Las Vegas is no longer a gamble anymore.

Oliver Lovat is the CEO of The Denstone Group, that offers strategic consultancy in resort development. He was faculty at City, University of London between 2012-2020 and University College of Estate Management 2010-2015. His research topics are Las Vegas Customer Behavior and The Evolution of Competitive Strategy Within Las Vegas Casino Resorts.

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