Unexpectedly, Las Vegas hit by U.S. downturn

4 mins read

By Deena Beasley (Reuters)

Sue Garrett, in Las Vegas for a birthday party earlier this month, went to what she considers extraordinary lengths to hold down the cost of her trip.

"We decided to sit through one of those blasted timeshare presentations to get a free hotel room," said Garrett, who lives in Los Angeles. She turned down the timeshare but earned herself and her husband a stay on the Las Vegas Strip for her trouble.

Similar stories are heard all over Las Vegas these days, where resorts are discounting and even giving away room nights just to attract enough people to keep their roulette wheels and slot machines spinning.

Vegas barreled through previous U.S. economic recessions with no problem, but the current slowdown — marked by home foreclosures and then high gasoline prices — has had a much bigger impact on the gambling mecca than economists expected.

And while free rooms and room discounts have kept hotels relatively full — occupancy is down just 1 percent in the year to July — gambling revenue is down 6.5 percent.

"People still have Las Vegas as their destination of choice, but their budget is less," said Jan Jones, senior vice president at Harrah's Entertainment, operator of nearly one-third of the Strip, from Bally's to Caesars Palace.

Harrah's and MGM, which operates 10 properties on the Strip including Bellagio and Circus Circus, have each cut about 1,500 Las Vegas jobs over the past year.

"There is no question that people are spending less money now," said Jim Murren, president and chief operating officer at MGM.

MGM plans to continue aggressive promotions, such as a $300 return travel voucher for a two-night stay at the MGM Grand. "Our business model is based on a desire to maximize occupancy and traffic at the properties," Murren said.

The majority of Harrah's hotel rooms in Las Vegas, Jones said, are "comped" — given for free — to higher-spending members of the company's bonus points system.

Two factors make the current downturn harder for Las Vegas than previous ones, according to analysts.

One is high gasoline prices, which will hit the pockets of the more than half of Las Vegas visitors who drive in by car or bus. No one knows how $4-a-gallon gasoline will affect their spending decisions, said Margaret Holloway, senior credit officer at Moody's Investors Service.

The other is the growth of places where gamblers can get a cheaper fix close to home, like riverboats in the U.S. Midwest and new casinos on Indian reservations like the MGM Grand at the Foxwoods casino in Connecticut.

The U.S. credit crisis has begun to dampen construction, a big economic driver since the 1990s.

Cranes have stalled at Boyd Gaming Corp's <BYD.N> $4.8 billion partially built Echelon project as the company awaits financing agreements for two joint venture deals.

And the projection for new luxury hotel rooms to be built by 2010 is down by half from a year ago as the weak economy and credit constraints lead companies to reconsider their plans.

MGM's CityCenter, due to open in late 2009 at a cost of $9.1 billion, along with Echelon, Wynn Resorts Ltd's <WYNN.O> Encore, Fontainebleau Las Vegas and a new hotel tower at Caesars will probably be the last projects built on the Strip for a decade, MGM's Murren said.

But the 23,000 hotel rooms still in the pipeline loom over an industry that can hardly fill the ones it already has.

Since last October, shares of Las Vegas Sands <LVS.N>, owner of the Venetian and the Palazzo, have fallen about 75 percent, while shares of MGM Mirage <MGM.N> have lost about two-thirds of their value. Harrah's, the world's biggest gambling company, is owned by Apollo Advisors and TPG Capital.

As the Las Vegas casinos offer discounts to keep their hotels full, the ripples of these policies are felt all over town and even in the plushest of venues.

"We feel what they feel — when you lower the rate you attract a different clientele," said Nikki Pishotti, marketing manager at the exclusive Canyon Ranch Spa Club, which gets most of its business from people staying at the adjacent Venetian and Palazzo resorts owned by Las Vegas Sands.

Similarly, shopping malls like the Miracle Mile at Planet Hollywood Hotel Las Vegas are forced to follow the casinos' lead by cutting prices. They are thronged, but 50 percent-off signs are common.

"Everybody is a little worried," said Marcia Martinez, who sells moisturizer at a booth in Miracle Mile. "There are a lot of people, but sometimes the restaurants are almost empty."

But like inveterate gamblers, Las Vegas boosters will never stop betting on the city.

The Las Vegas Convention and Visitors Authority, trying to make the best of the downturn, is running an ad campaign under the slogan "Crazy Times Call for Crazy Fun" and is looking to bring in more visitors from overseas.

The growth of Macau, where the Chinese government has been encouraging the construction of Las Vegas-style gambling resorts, will create new gambling customers for Nevada, said Rossi Ralenkotter, president and chief executive of the authority.

Nevertheless, the authority recently delayed renovation plans for the Las Vegas Convention Center — pushing final completion of the $890 million project to 2011.

"I'm betting that Las Vegas will continue to grow over time," said Keith Schwer, director of business and economic research at the University of Nevada, Las Vegas.

"It's a little bit different than a boat in St. Louis or whatever. Here, it's a destination and the competition is strong. The losers get bought out or blown up."

Matthew Glazier, co-owner of Strip House, a high-end steak house above Planet Hollywood's casino, said that business since it opened a year ago has been around what he expected.

"People know when they come to Vegas they are going to spend a little more than they can afford," he said.