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IN-DEPTH 27 June 2018
Have we seen 'peak perk'?
Nicholas G. Colon considers the elimination of benefits and freebies for Las Vegas’ lower spend players as self-defeating in terms of repeat business
By Nicholas Colon

In the 1950s, the infamous New York and later LA mobster Benjamin “Bugsy” Siegel had a vision of what Las Vegas should be. His dream was a place where adults could go to escape their everyday lives and be treated like royalty, while mingling with movies stars, professional athletes and singers. An oasis in the desert with great food and world-class entertainment could be experienced at a steeply discounted cost. And, for years it was exactly that. For the past decade, Las Vegas, and really all casino-centric cities, have seen a sharp decline in the amenities that first made Las Vegas great. This begs the questions; why is this being done? And, what are the value reductions being experienced?

Many Las Vegas visitors have been frequenting Las Vegas at larger and larger intermittent ranges over the past 17 years.

I assert that this is because the value seen prior to this time is no longer there. In the late 1990s and early 2000s, casinos were handing out some form of RFB comps (room, food and beverage) to any player wagering almost any amount for an hour or two a day. This is because the casino games were their primary revenue drivers for the resorts. This worked well for gaming companies because the visitors had a good chunk of discretionary income and there was a strong, albeit inflated, world economy.

The competition for gamblers was fierce, and casinos would compete with one another by offering mid- and high-level gamblers show tickets, room suites, and of course, their undivided attention. And as in any competition, the best performer won.

With the mid- and high-level gamblers all scooped up, the casinos turned their attention to low-level gamblers. Enter the introduction of the multi-line, multi-credit, nickel and penny slot machines. The low denomination games were designed specifically for, and marketed directly to, the low discretionary income gamblers. These included peoplewith families and the lower middle class.

The casinos and game designers conjured up the lower limit games with an increased house edge to grow an already impressive revenue stream. The reasoning was that if massive resorts had thousands of rooms available, we may as well fill them and “gamble” that the occupants will lose more than the cost of the room. And we will give them a couple free buffets in the hope that they will lose more than the total cost to the company.

And for a long time the casinos were right.

The casinos were so right that they made massive investments in their low denomination slot machines. The overwhelming majority of any gaming floor is now composed of these types of machines. Because much of the population falls in the low discretionary income range, this approach worked famously. As long as the casinos were able to provide some form of RFB comp to the players, their family vacations were subsidised by the casinos. But as we all know this was not the case.

In 2002, the US and world economies suffered the first in a series of major set-backs. When the internet bubble finally burst, a lot of the new wealth that was driving the middle-class to flourish was gone. This caused some, but not all, people to scale back on their discretionary income. And rather than let the economy correct and redefine itself, it was artificially propped up by the false housing boom. Central banks lowered interest at the behest of their governments, making money easily accessible for the middle-class.

And as in 2002, in 2008 the bottom once again fell out, and the driving force behind the economy evaporated. But, this time it not only affected the customer base, but directly caused tens of billions of dollars in real estate value to vanish, assets that were held by gaming companies. MGM was forced to take on Dubai as a partner and write down several billion dollars in losses, mainly to offset the financial turmoil caused by the Las Vegas City Center project.

The 2008 collapse was doubly harmful for the casino gaming industry; it greatly reduced the disposable income of the customer base, and greatly reduced the total value of the companies, and shareholders were not happy. In the years prior to the 2002 bursting of the internet bubble, the gaming companies invested heavily in low denomination slots to attract the biggest portion of the population. However, when that portion of the population no longer has money to spend, the casinos no longer have a customer base.

In 2015, total losses for Nevada casinos exceeded $660m, and believe it or not it was an improvement over previous years. Casinos implemented a series of actions to stop the bleeding. Every department was forced to become profitable. Even food and beverage, which was always a loser for casino resorts, had to become profitable. Charging people for parking, as much as $20 a day at the five-star resorts was particularly offensive to the customer base. Another absurd aspect was the $15 a day resort fee implemented at all resorts in Nevada and elsewhere.

These two actions were only the start of what happened. Casinos have embraced the low denomination high hold percentage games. The downfall is that the players are burned out fast and repeat business is sparse. In general 80% of an organisation’s revenue comes from 20% of customer base. Now, it is not uncommon to see a 90/10 split due to the customer reduction. The “turn and burn” approach is rapidly taking over. Casinos in Las Vegas are focusing on the Monday-Thursday convention crowds.

They are charging for every aspect of person’s stay, and in this respect it is becoming more of a business-to-business operation rather than a customer service operation. The resorts are filling rooms but charging the companies for them; with this approach the resorts gain revenue from the room sale but reduce their repeat business.

It is easy to get away with this when you have consistent turn-over of new customers. In Las Vegas, the slowest month is December, and it is no coincidence this is when the convention season is at its lowest.

The value is no longer there for vacationers and gamblers. In the modern era casinos are installing applications on their slot machines that determine if the frequency and wager amount is enough to qualify the player for a free drink. And more recently, Boyd Gaming, the company that owns several casinos in the Las Vegas valley, have terminated free vouchers for their Friday night seafood buffets. This does not make any sense to me, as Friday nights are when people get paid, and it’s very likely they will play after they have filled their bellies with crab legs.

Las Vegas is changing. The corporate greed philosophy is all consuming. As the crowds get thinner, the casinos will find new ways to squeeze customers and new ways to eliminate reward benefits for the player. I don’t see any way in altering the current trajectory until the old guard of executives leaves. Better games and better comps will cause players to return but only when coupled with a thriving middle-class, and over time. The US economy has seen an uptick in recent months but only time will tell if it will be enough.
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