It Wasn’t Better In The Good Old Days

“After the Tangiers, the big corporations took it all over. Today it looks like Disneyland. And while the kids play cardboard pirates, Mommy and Daddy drop the house payments and Junior’s college money on the poker slots. In the old days, dealers knew your name, what you drank, what you played. Today, it’s like checkin’ into an airport. And if you order room service, you’re lucky if you get it by Thursday. Today, it’s all gone. You get a whale show up with four million in a suitcase, and some twenty-five-year-old hotel school kid is gonna want his Social Security Number. After the Teamsters got knocked out of the box, the corporations tore down practically every one of the old casinos. And where did the money come from to rebuild the pyramids? Junk bonds.”??

- Sam “Ace” Rothstein

I recently re-watched Martin Scorsese’s Casino. In his closing monologue, Ace Rothstein bemoans the evolution of the city. A drive down the Las Vegas Strip in the 1990s would pass a whole range of properties and a collection of idiosyncratic owners. You would see the early megaresorts - Wynn’s Mirage and Treasure Island, Bennett’s Circus Circus, Luxor and Excalibur, and Kerkorian’s return with The MGM Grand after 1993. Also present were Boyd Gaming’s Stardust (The “real” Tangiers), Ramada’s Aztar at The Tropicana, The Holiday Inn, The Flamingo Hilton, Park Place’s various assts, Ralph Englestad’s Imperial Palace, Michael Gaughan’s Barbary Coast and Jack Sommer’s Aladdin. Some corporate, some private but all very different.

Take the same drive a decade later in the 2000s, the majority of properties were owned by just MGM and Caesars Entertainment. The true corporatization of the industry was a consequence of this consolidation and has had a profound impact on Las Vegas. While many reminisce about fonder times when the Mob ran the town, with the new ownership there is a lot to be thankful for.

Professionalizing The Industry

The first MBA graduate to embrace the casino business was Meshulam Riklis (MBA Ohio State), who used high interest-bearing bonds to acquire The Riviera. As anecdotes of his ownership testify, corporate Las Vegas he was not, but innovative he was in driving revenues. Rilkis’ colleague Michael Milken (MBA Wharton) used the same financing method to realize Steve Wynn’s transformative vision at The Mirage. The Mirage led to the building boom of the 1990s, (although some of the developments did not use bonds to finance) which enabled the modern casino and today’s Las Vegas.

The new properties needed a new workforce. This led to new perspectives and increased study of hospitality, which with applied technology and investment in people, a new generation of educated and skilled employees emerged, many to assume accelerated leadership roles to coincide with industry growth. The “25-year-old kid” talking to the “whale” had a hospitality or management degree, was ensuring gaming funds were obtained legally and that the customer was able to participate in his gaming activities without a known gaming addiction.

These highly schooled entrants to market brought commercial sensibilities to the businesses, and with diverse influences and insights could accurately assess the value of decisions, analyze what is possible and could present these strategies in a coherent way. Moreover, there were expectations that the new workforce would professionalize the business environment and eliminate some of the less salubrious practices that had permeated into many cultures.

Professor Michael Green?(et al)?wrote in the Cornell Paper “From Maverick to Mafia to MBA”:?

“Without leaders who could relate the remarkable tale of Las Vegas in terms that investors could appreciate— and, more important, in terms that allowed them to justify investment—Las Vegas probably would have been unable to build its megaresorts on the scale that it has.”

Despite the workforce and leadership professionalizing, the true corporatization did not really begin until Harvard Professor Gary Loveman (PhD MIT) took his highly analytical toolbox to the casino environment.?

Loveman’s recruits used data, collected at every source possible, to maximize revenues, increase margins and test every hypothesis that could be imagined. With such rigor in the operational model, further capital became available, and the asset class moved from “junk” to investment grade.

The success of Harrah’s/Caesars under Loveman forced others to emulate – and many of the efficiencies that his model discovered became industry standard.

The corporatization of the gaming industry attracted a second talent influx to the sector, with resorts hiring directly from MBA programs, enabling further growth and increasingly ambitious thinking, with rigor that would not have been possible a generation earlier.

It’s Not About The Casino

Back in the day, the route to becoming a casino executive started in the pit. It was all about gambling. Today it is not. The mission is about how to maximize profits for shareholders without compromising the customer experience.?

What we know is that customers are prepared to pay for what they perceive as good value; pre-pandemic lunch buffets ranged between $8 and $40. Both have the same utility value and executives identified that there is a demand for both offerings.

Indeed, over the past 30 years, Las Vegas has become somewhat of a culinary destination, not just featuring “celebrity” chefs and leading restaurant brands but becoming a real destination for many pleasure seekers and conventioneers that have no desire to gamble. Pre-pandemic, Las Vegas was home of 16 of the highest grossing bars and nightlife venues in America and host to over 22,000 meetings.

Today’s leadership believe that good business strategy is more than getting customers to gamble for longer; is the understanding of customer needs and behaviors and investing in the product that enables this.?

We note that over the past 30 years – the era of corporatization – Strip revenues have grown from $2.1bn to $18.5bn. Non-gaming has gone from 41% of the revenue mix to 65%. We also note that non-gaming revenue has grown significantly faster than gaming revenues, evidence is that Las Vegas has gone from a gaming town to an entertainment center.

We think nostalgically about the Rat Pack in the showrooms of the early 1960s. The reality was that The Rat Pack players were still regularly in the showrooms in the 1980s, as members began to falter and pass on. For many of the contemporary artists of that time, Las Vegas was a tour stop to avoid. The hotels had small, basic rooms and other than gamble, there was little to do.?

Today the rooms are competing for opulence, city wide amenities are diverse and shopping is the number one activity undertaken by tourists. Few would say that they would rather have a vacation in a 1980s casino than in one of today’s megaresorts.

Quite simply, across the board, the product is incomparable today than in previous decades.

The Corporatization Problem

The new corporate ownership has not all been perfect. The product is more homogeneous than 30 years ago, and a strong argument exists that reduced competition has led to a shortage of innovation. However, just look at The Cosmopolitan, or Absinthe at Caesars, or Eataly, On The Record and Best Friend at Park MGM. There is plenty of innovation, some successful, some less so, but the costs to do something new are expensive and good investment is targeted to reduce risk. Even in the “good old days” there was little radical differentiation, Caesars Palace and Circus Circus aside, and with several new market entrants, there will be fresh and interesting additions to the mix.

The problem is not corporatization, but consolidated portfolio ownership. If an owner has multiple properties, then capital is directed where the return is higher. That is good business practice but leads to lower reinvestment than if a property is standalone. Of course, there are inexplicable outcomes to business problems, such as how to reduce the high cost of operating a valet and monetize parking (which typically costs $20,000-$30,000 per space to build) or reduce the commissions that the OTAs charge for rooms. Directly charging the customer is probably the worst of all options in a competitive hospitality setting.

But on balance, it is my view that this generation of Las Vegas’ leadership has built on the platform of previous generations, created a trusted, regulated and attractive industry, experiences that customers love and thanks to decisions made to grow a smarter workforce a generation ago, a leadership cadre has emerged that compares positively to any other industry.?

And nobody is losing digits in the backroom.

Oliver Lovat leads the Denstone Group, which offers strategic consultancy on customer-facing,asset-backed investments, including casinos. He is visiting faculty at Cass Business School at City, University of London.

This article first appeared in Cetmag

www.denstonegroup.com