Reaching For The Stars..And The Starbucks

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It has been well documented that the sustainable success of Las Vegas over the past 20 years has been due to the rise of non-gaming revenues rather than gaming revenues. Non-gaming revenues account for c.64% of the total. Indeed, even with recent declines, Macau’s gaming revenues are over 6 times those of Las Vegas, but their non-gaming revenue is under 10%.

Developing the non-gaming offering has proved the saviour of Vegas, but this has not been easy or straightforward and the lessons of the operators here are worthy of some detailed examination.

The Starbucks Phenomenon

There are over 30 Starbucks coffee shops on the 4 miles of the Las Vegas strip; the latest, if blogs are to be believed, will be near the front of the Cosmopolitan. If he stood at the front of this unit, Tiger Woods could probably drive a golf ball into 3, and possibly 4 other units serving Seattle’s favourite coffee, pastries and sandwiches.

Starbucks has done well out of Las Vegas and the alignment is obvious; visitors – whether convention customers with limited time or tourists looking to log on to the free wi-fi – want their coffee the way they like it. Starbucks is the ubiquitous brand that helps in low-impact decision-making and is no more than a couple of hundred yards away from heavy population centres in every major city, always ready to meet the customer needs.

However, the roots of Starbucks’s dominance on mass-market Strip customers are not their own and one needs to look back 30 years to see the beginning of the brand story.

RIV 1984

It Started At The Riviera.

Dr David Schwartz of the UNLV Center for Gaming Research calls it the “Burger King Revolution.” In 1984 the then General Manager of the Riviera looked out of his window at the juxtaposition of the offer of a $2.99 buffet at Circus Circus and the line that formed outside the standalone McDonalds unit that had opened on the Strip. He concluded that from the customer’s perspective, the value proposition provided by a branded burger sold at a premium was greater than a subsidised buffet. On this basis, how could the Riviera capture the customers who had walked outside Circus Circus for lunch, and get them to come in to the Riv?

The GM, Jeff Silver, approached Burger King, and against the wishes and instincts of casino executives, gaming commissioners and industry experts, opened a Burger King at the front of the Riviera Hotel. This was the first fast food franchise to open in a Las Vegas casino and within 12 months this was the highest grossing Burger King in the company’s portfolio.

In 2015 White Castle, purveyor of square burgers in a white bread bun, opened their first branch in Las Vegas, but within 24 hours it had closed its doors. Not for violence or construction issues, but with an estimated 4,000 visitors per hour, the unit had simply not anticipated demand and had run out of stock.

 

WHITE-CASTLE-LAS-VEGAS-CLOSES

Food and Beverage

In 2007, the average Las Vegas visitor spent $254.49 on food and beverage, but by 2014, this had increased to $281.88. In a period where expenditures of lodging and gaming budgets had fallen 27.3% and 4.6% respectively, the increase in F&B spend of 10.8% is quite remarkable.

In further analysis between the ‘gaming visitor’ and ‘non-gaming visitor’s’ expenditures, the gaming visitor’s non-gaming expenditure had risen from $139.41 to $147.96, but the non-gaming visitor has risen from $201.15 to $254.60. Quite simply, the non-gaming visitor’s budget is increasing faster.

Breaking this down further, per available room, food sales total $34.24 per day and beverage Sales total $20.82. So where the ADR of the Las Vegas hotel room in 2014 was $116.73, the spend on F&B was $55.06 – slightly over 47% of room rate!

At last count, there were over 700 food and beverage options on the Las Vegas Strip.

Operating models

There are three operating models for food and beverage on the Strip. The first is the fully leased model, where the retailer leases the space from the casino resort (or landlord) and operates independently. Secondly is an incentivised lease, where there is an outsourced model where there are opportunities for shared revenues, so a retailer may have a rent, a turnover provision and a management agreement, and points of revenue are carved out across the operating business. The final model is where the casino operator operates the food and beverage outlet.

Of course there are various advantages and disadvantages to each of these. Steve Wynn makes a point that his businesses have always operated their own food and beverage – and that the non-gaming revenue has historically been higher than their gaming revenue, but that comes with operational risk, higher costs and the inability to bring in brands that customers have resonance with.

On the other hand, other properties have been able to bring in external brands that their customers value and align with the property. The likes of STK at the Cosmopolitan, Gordon Ramsey at Caesars and Yardbird at Venetian have all been great successes, with the resorts gaining increased visitation, revenue and brand equity through alignment, without taking operational risk or making significant expenditure.

For those of us who study strategic marketing in Las Vegas, this is a fascinating area.

Strategic Competitive Advantage

As regular readers will note, my core work is on strategic competitive advantage within casino resorts, for which there are two factors – location and loyalty.

Assuming location is nothing that a management team can change once the asset has been built, the challenge for management is in building customer loyalty.

However, the core product of gaming is not differentiable by price and in any meaningful way by product. Indeed, in the rooms and customer experiences, all the major operators offer similar customer centric experiences.  In the area of functional loyalty, customers are loyal to particular aspects, experiences and brands that they identify with.

As we notice with the Riviera back in 1984, certain customer segments want brands, which reinforce preconceived experiences and allows for an instant alignment for the customer to relate to in the crowded Las Vegas market.

The food and beverage offering is one of the key ways in which operators can differentiate their offering; research suggests that 60% of Las Vegas visitors see the range of dining options as either key or important in influencing their decision of where to stay when in Las Vegas.

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The Dilemma

Caesars’ new Linq hotel has seen a successful relaunch, with increased occupancy and rates that average at over $100 per night. The Linq promenade has been an experiment of bringing brands for the Millennial customer into one place. Some original, like Guy Fieri’s diner and Purple Zebra, but others like Yardhouse, Flour and Barley and, of course, Starbucks have supplemented this range.

With over 40m visitors, Las Vegas is certainly the place to be for entertainment and there is a proven market for global food and restaurant brands ready to advance on the Las Vegas market- not just in the low impact decisions such as fast food and coffee, but the F&B super-brands and celebrity chefs which feature in all the places that the chic set like to frequent. Moreover, it is clear that by bringing in the external brands, this is an easy win for the operators.

For every Burger King and White Castle, Nikki Beach, Bagatelle and the entire SLS, prove that a strong brand does not guarantee instant success, however with alignment, it certainly de-risks the operation.

For me, Las Vegas has flourished because that it is a hub of innovation and uniqueness where the high margin gaming revenue has allowed developer’s imaginations run riot and people to take risks– where else can you dine with Picasso paintings or overlooking a fountain dancing to Sinatra?

Without the creation of these unique and special experiences, Las Vegas will just become another corporate shopping mall, with the best of the rest coming to town to scoop up a bit of the action.

Originality works when you understand your customer, look at Downtown Las Vegas, with Oscar’s at the Plaza and Siegel’s 1941 at the El Cortez, which note their customer’s needs and play to the strengths of the properties in questions.

Since moving to Las Vegas, I have been working with operators to understand their market and customer and help develop appropriate strategies for competitive advantage.

Las Vegas of 2016 is very different from Las Vegas of 1984.

My message to operators is this, by developing a unique brand and experience, you are creating a real strategic advantage for you and your business in this most competitive environments. It is worth the effort. Except in the area of coffee – people just want Starbucks!

Venice, Vegas and Kirk Kerkorian

I visited Venice again earlier this year. Russian dissident, Alexander Herzen wrote of Venice;

To build a city where it is impossible to build a city is madness in itself, but to build there one of the most elegant and grandest of cities is the madness of genius.”

Venice has evolved over the past two thousand years, always innovating to offer value to its citizens and visitors, as a trading outpost, a transport hub, an industrial complex and of course a centre of tourism. It remains one of the most iconic and impressive cities in the world and reminded me a lot of Las Vegas, not just of the themed casino resort.

Incidentally,  the origins of the modern casino are found in the Ridotto, in the private wing of the Chiesa di San Moisè, which opened in 1638. Unlike other gaming saloons, it was Government owned and offered games of chance where the house offered bets against the players.

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Kirk Kerkorian 1917-2015

America’s Venice is Las Vegas and this week we saw the passing of Kirk Kerkorian, a gambler, a builder and a visionary, who had more to do with the development and evolution of modern Las Vegas than any other.

Others will write tributes focusing on Kerkorian’s daredevil entrepreneurship, his legendary company building and aggressive corporate manoeuvrings, however my tribute is somewhat different. We look at Venice and instantly recognise the landmarks that have gained iconic status over centuries – St Mark’s Basilica and square, The Rialto Bridge and Doge’s Palace. Kerkorian’s influence on Las Vegas is as pronounced.

In the 1960s, post-war entrepreneurs Howard Hughes and Kirk Kerkorian introduced the corporate world to Las Vegas and as respected and respectable business leaders, they saw the vision of what Las Vegas could be. However Kerkorian stands apart; he was genuine visionary. Whereas nothing remains of Hughes’ Las Vegas properties, Kerkorian’s legacy is evident in the kaleidoscope of colours when viewing the modern Las Vegas Strip.

Without Kirk Kerkorian it is certain that Las Vegas wouldn’t exist as the same town. Notwithstanding the clean finance and strategic investment via corporate acquisitions, his influence is felt in so many ways that even the casual visitor would be aware of his legacy, if not his name.

Kirk Kerkorian

Backer

Kirk Kerkorian was originally a land investor. Indeed MGM is still one of the largest landowners on the Strip area and have been proactive in supporting external ideas and innovations on or near their current properties. Without Kerkorian’s acquiescence as a landowner, Jay Sarno wouldn’t have built Caesars Palace, which was on Kerkorian’s land. So no Caesars means no hedonistic escapism, no themed properties, no illusionary excess and a whole chunk of gaming iconography just wouldn’t exist.

MGM 1993
MGM Grand 1993

Developer

Without Kerkorian’s gamble, the integrated mega-resort wouldn’t exist as it was the International (now Westgate) which opened as the largest hotel in the world in 1969 and which first tested the Y-shaped building structure, subsequently seen from the Mirage to the Bellagio in resort design. Again he broke the mould with the MGM Grand (now Ballys) in 1973 and the new MGM Grand in 1993. All three were the largest hotels in the world on opening. Without these bold steps, gone is the grandeur and spectacle.

Entertainment

Kerkorian was in the entertainment business. His desire to entertain the post-war generation and integrate Hollywood to Las Vegas was pivotal. It was he that introduced Elvis Presley, the first post-war icon, at the heart of the International, where Elvis played every one of his 626 sold out concerts – see the video above! The assimilation from a gaming city to an entertainment town owes much to Kerkorian and MGM. From leading sporting events, magic shows, theme parks, singers and nightclubs, MGM has consistently pushed the envelope and tried to innovate.

Venice wasn’t built in a generation. Las Vegas was, and much of that is due to Kirk Kerkorian, a genius among men and one that never seemed to want to take any credit. May his memory blow through the desert wind for many years to come.

Business Lessons Learned From The Reinvention Of Las Vegas

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.

BUST!

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.

Steve Wynn, G2E 2014
Steve Wynn, G2E 2014

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.

Las Vegas Sands Convention Centre
Las Vegas Sands Convention Centre

What can we Learn?

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

 This article is adapted from the original, published by Gambling Insider: http://www.gamblinginsider.com/

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