The capacity (over)capacity question

The question of cutting capacity comes up periodically. This article is over a year old, but it tackles the issue directly. Imperial Palace, as Harrah's physically oldest property and one that was purchased five years ago as a tear-down is mention. The problem is that it is one of the highest grossing Harrah's properties by percentage (according to the CEO). Individual numbers are not published.

Quote: Copyright © Las Vegas Review-Journal

INSIDE GAMING: Casinos may have to profit or perish
HOWARD STUTZ
Mar. 01, 2009

Wall Street is suggesting the unthinkable. Strip casino operators might actually close under-performing resorts because it makes sense in the current economic environment.

JPMorgan gaming analyst Joe Greff posed the concept to Wynn Resorts Ltd. Chief Executive Officer Steve Wynn during a conference call when the company was explaining cost cuts of $75 million to $100 million. Greff wondered whether the competition might reduce capacity.

Wynn pondered the notion, but wouldn't speculate.

Macquarie Research gaming analyst Joel Simkins thoroughly addressed the idea in a Feb. 20 investors report. He said the casino industry could downsize operations in the way other consumer-service businesses have.

"The sector stands on the precipice of a shake-out and capacity rationalization," Simkins said. "It is reasonable to assume that 5 to 10 percent of the excess supply in the industry could be shuttered in one to three years."

Simkins focused speculation on older resorts hurt by recent development and new competition.

Last week, rumblings surfaced that Harrah's Entertainment might consider closing the Imperial Palace. The aging casino was purchased in 2005 for $370 million as a potential tear-down. That was before the down economy scrapped the company's east Strip redevelopment plans.

The transfer of the "Legends in Concert" show to Harrah's after 26 years at the Imperial Palace took away the casino's biggest draw and fueled conjecture.

Harrah's spokeswoman Jacqueline Peterson quashed the rumors, however, saying the Imperial Palace "is doing very, very well."

Simkins didn't name resorts; he just proposed the idea. Older casinos can't compete, he said, no matter how much money is invested in new games and equipment.

"The closure of casinos would be a negative short-term headline," Simkins said. "This cleansing of the system will ultimately benefit the remaining, stronger operators when the turnaround comes."

Although phrases like cleansing of the system sound good to some people ultimately the idea seems doomed. The drop in revenue in Atlantic City has been more than the sum revenue of the five smallest casinos which makes people think that it would be better to close them.

But it seems that it is nearly impossible for a property to get so bad that the only viable option is to close the place.

If Riviera should close, it is not hard to imagine that it's guest will primarily head to Circus Circus, Sahara and get scattered to all the motel 6's and Motel 8's, and Travel Lodges all over the strip region. Maybe some will head downtown. But it's hard to imagine any single property getting a real jump in profitability by the removal of this aging casino's rooms.

If you look at the revenue curve for downtown Las Vegas you would never be able to point out the closing of the Lady Luck which represented over 6% of the rooms. Basically a change in inventory of that size is still insignificant compared to the other factors that drive business.

On January 9, 2006 the Boardwalk closed, and in November 2006 the Stardust closed and on July 2007 the New Frontier closed. That reduced the inventory by 3200 classic rooms in a year and a half. There was some feeling that the downtown may have benefited from this reduction in strip inventory. Fremont Street is about 5000 rooms outside of the 4 diamond Golden Nugget. That may have been true, but downtown was already raising their room rates (from ADR of $50 to ADR of $70 in one year) because demand was so high around this time. Room rates on the strip were often 2 to 3 times that amount and people were going downtown to get some relief. It is hard to say how much was because of the closing of the three older casinos.

Although the LVCVA publishes the 148,000 room inventory for Las Vegas, I believe that is for the entire county and includes every motel and non-gaming hotel in the city.

The strictly casino hotel rooms on the strip are under 90,000 rooms. There may be over 10,000 non-gaming hotel rooms or hotels with minor casinos including a the business hotels near the convention center and in the Marriot complex to the west of I15 and south of Tropicana.

How many hotel rooms do you think it would take to cleanse the inventory, or until there would be a noticeable difference in one of the remaining resort's bottom line?

Cleanse the inventory?

That sounds like the big casino operators should get together and all agree to simultaneously close their smallest or least profitable property.

Nobody wants to be the one to close a property. Not only is it bad publicity, but the loss of guests would not be taken up by the sister properties, but by the discount properties at the competitors.

So a simultaneous closing is the only way to profitably and equitably make such a change.

Except any such agreement for silmultaneous closing would violate antitrust or price-fixing laws.



You have to realize that budget downtown and strip hotel rooms are needed. There is a segment of the population that will not travel to a Super 8 type facility in Vegas, but want a Super 8 type price for a strip or downtown location. "One block away" is too inconvenient for these people. They won't go to Vegas if they can't get the location they want.

I'm one of those people. That's why I'm staying at Imperial Palace in September.