In the past calendar year, the Las Vegas Convention and Visitors Authority (LVCVA) reported that 41,126,512 visitors came to Las Vegas, finally shattering the 40m visitation ceiling that only five years ago looked impossible. Like other markets, the recession forced Las Vegas to react to the changing conditions, but unlike other markets, in true Las Vegas manner, it beat all expectations. The story of how this happened has lessons for all of us involved in strategic marketing and business.
The year 2009 was a bad one for Las Vegas. By year-end, the 43 properties on or around the Strip reported gaming revenues of $5.5bn, well below the $6.8bn reported from the 38 properties that made up the market in 2007. It was also a bad year for Atlantic City, as it posted revenues of $3.9bn, significantly less that the record revenues of $5.2bn in 2006. Unlike Las Vegas, the decline has continued and in 2014 the final revenue total was $2.7bn, less than 50% of the previous high.
By 2014 Las Vegas had all but recovered, posting gaming revenues of $6.3bn, but that is only the beginning of the story as the visitation numbers are staggering. Build it…and they might come. The history of Las Vegas is a story of excess – either excess demand or excess supply!
When the Tropicana (1957) and Stardust (1958) opened, the critics argued that there was no demand for these properties, each with over 1,000 rooms. For a time they were correct, but when the Convention Center opened in 1959, the demand for midweek hotel space met the excess supply that was needed for the weekend visitors.
Between the opening of the original MGM Grand (now Bally’s) in 1973 and Mirage in 1989, there was no significant Strip resort development, but the case for untapped demand was evidenced by Steve Wynn’s gamble, and the 1990s saw 10 resorts open with nearly 30,000 rooms within a short walk from the Mirage’s volcano. In 1990 the historic Convention Centre was demolished and a 1.6m sq ft new centre opened, expanding to 1.9m sq ft in 1998 and 3.2m sq ft in 2002.
But the 2007 recession was somewhat different. Between 2007 and 2009 the 39.1 million visitation level didn’t just stagnate but actually collapsed to 36.3 million, which coincided with a new supply of almost 11,000 new rooms on the Strip, as the Palazzo, Encore, Vdara, Mandarin Oriental and Aria opened their doors. Occupancy targets were not met and if one looks back at the news columns at that time, some believed that there was excess supply that may never be met.
CHANGING FACE OF THE CUSTOMER
“It’s always been that the non-casino story, was the story. It was never the slot machines. They have been everywhere for centuries and nobody gave a damn about them.” – Steve Wynn, G2E 2014.
This summer Gary Loveman steps down as CEO of Caesars Entertainment. Loveman’s success was built on offering additional value to Total Rewards players, whether in Las Vegas, Atlantic City, Tahoe or throughout the regional casino market, by understanding the behaviour of gaming customers and creating experiences for customers through an inside-out business model. The antitheses of Loveman’s data-driven model is Sheldon Adelson and Steve Wynn’s top-down decision making, which is based on giving customers what they want – or what ‘we’ think they will want.
On one level, the reinvention of Las Vegas was nothing particularly innovative. Some chose to initially look internally and adjust their business models, but others looked outwards and met that excess supply, by stimulating demand by identifying a new segment of customers.
The LVCVA reports annually on visitor profile. In 2009, 72% of visitors were 40 or older. By 2014 this was 57%, and the average age had moved from 50 to 45.2. A total of 19% of visitors were from abroad – up from 14% in 2009. This is a huge shift in visitor profile. New customers are younger, international and are not traditional gambling customers.
In analysing these figures some more, we note that if one discounts the gaming spend, non-gaming customers are actually more profitable than gaming customers. Non-gaming visitors’ spend has increased over $45pp in the past decade, whereas the gaming segment’s non-gaming spend has risen only c.$8.50 over the same period. Considering that there are considerable costs in managing the gaming customer’s expectations in terms of incentives and volatility (gamblers actually sometimes beat the house!), the non-gaming customer clearly becomes an obvious target customer.
What can we Learn?
- Analyse and Strategise
This may sound like common sense, but it took some Las Vegas resort operators time to analyse what was going on, while others who rushed in made some costly mistakes. The established rules of resort management failed in the early days of crisis management. Conventional wisdom based the response to 2008 on 2001’s 9/11 ‘shock’ rather than the 1950s oversupply crisis. The initial response was to slash costs and drop room rates, believing that visitors would still come, but spend more on gaming if less on rooms. When room rates fell, gaming revenues did not compensate. By ‘comping’ rooms, what the casinos saw was a deterioration in the value proposition, and it has been a five-year battle to creep ERVs up to where they were in 2008 in Las Vegas.
A similar price-leadership strategy has all but destroyed Atlantic City. The double whammy hit, as rooms became uneconomic to service and casinos offered incentives that eliminated the house advantage in order to try and achieve revenue targets. The effect has been to erode the value proposition to the point that casinos have closed.
- Give customers what they want, now!
Harvard Professor, Anita Elberse writes that we are moving into a ‘blockbuster’ society, where entertainers, sports stars and mega-spectacles form the basis of key experiences in modern society, and people want to be part of them. If this is the case, Las Vegas is the blockbuster town for the millennial age, with the best dining experiences, hottest clubs, leading DJs and great product.
Las Vegas’s operators have curated a calendar of must-see events, but also invested in a portfolio of must-do experiences. These limited time engagements and residencies have both created visitation and increased revenues – there is a belief that the show that Las Vegas can put on is better than anywhere else.
It was reported earlier this year that seven of the top 10 nightclubs in the USA are now in Las Vegas, producing almost $450m per annum, with Omnia, the latest offering at Caesars Palace, reported to have cost over $100m to construct.
- It’s just business
In 2014, 5,169,054 business people attended 22,103 conventions. Local executives’ opinions on President Obama’s advice after AIG’s collapse, for federally supported intuitions to avoid conventions in Las Vegas, ranges somewhere between unhelpful to malevolent.
Despite the President’s caution, Las Vegas has become a place to do business. The Convention Center has grown to meet the demand for convention space and the move by the LVCVA to acquire and implode the Riviera to build over 900,000 sqft convention space only emphasises the importance of this in Las Vegas’s future.
Moreover, conventioneers spend more. They see shows, dine on the corporate dollar and perhaps a spouse will gamble or go shopping. Seeking to attract group and convention business is a sure winner in developing a sustainable business model. It is my hypothesis that Vegas’s reputation as a place for international trade will only enhance in the coming decade.
- Work out what your competition is – and better it!
Las Vegas has a structured and focused approach to challenging other convention towns. Thanks to the Hangover and other movies, Vegas is the place, globally, where one has their bachelor party or indeed any other landmark event where a group can come and spend some money and have some fun. For the SoCal group (which still constitutes c.30% of visitation) Las Vegas is competing with any of the beaches and highlights of California, so must have bigger clubs and better DJs. For each segment of visitor, the resorts identify that customer, what they want and when they need it, and deliver that better than the competition.
- Innovate ‘outside the box’
Listen to Steve Wynn. Las Vegas has realised that it really isn’t about the casinos. Las Vegas has gambled on retail, nightclubs, restaurants, conventions, shows and attractions of all shapes and sizes, and visitors seeking experiences have chosen to save money, book flights and travel to the middle of the desert for that escape from reality.
If you want your customers to be loyal in a competitive environment you have to give them something to be loyal to, and give them a reason to express their loyalty. Innovating, changing and creating something new is always appreciated by visitors.
The Las Vegas Strip posted a 5.54% year-on-year decline in gaming revenue over the past six months. This time, nobody is worried.