The casino is the loss leader

The Cosmopolitan seems to have reversed the traditional business model for Vegas.

Net revenues for The Cosmopolitan were $126.1 million in the second quarter of 2011. Food and beverage revenues totaled $70.1 million i, while room revenue was $45.9 million. Hotel occupancy was 91.4 percent and average daily room rate was $246 .

Casino revenues totaled a mere $28.2 million compared to casino expenses of $25.0 million. The property reported a net loss of $54.3 mil.

The Cosmopolitan is continuing development of the West Tower (Phase II), which should be completed by September 2011. Phase II will add 968 hotel and condominium-hotel style units to the Phase I total of 1,998 units.

Do you think perhaps that The Cosmopolitan is marketing itself as "An Experience" rather than just another gambling joint with "frills".

The press always emphasizes the decor, the nook and crannies, the pool table, the secret (lol) Pizza Joint, the anatomy of the greeters, the exotic cocktails, that Chandelier bar, the events ... ain't read much about the casino at all. I'm sure they want gamblers there but perhaps it really is an after thought. Its perhaps similar to those pool parties that also offer a bit of blackjack. Clearly the blackjack is just a side line, the real money is made selling outrageously priced booze to outrageously under-dressed yuppies. The Cosmopolitan might be thought of as a pool party without the sunshine and bikinis.

Of course we don't know if this is what they intended or merely what the gambling public gave them: Gawkers there to "experience the ambiance" or some such thing.

Its like a Bar-Restaurant sort of deal. Does the kitchen support the bar or does the bar support the kitchen?

Perhaps it was inevitable. I recall the review some Vegas commenter did about City Center's casino several months before it opened. He described all the brightly lit slot machines, the tables, the general hub bub, the signage, the carpets, etc. etc. ... it was all pure whimsy since the place was nowhere near opening yet and he had never been there but the point he was trying to make is that when all is said and done, its a casino. You go there, you place wagers, then they either take your money or they give you more money, all the while having pretty girls serve you some free booze.

Perhaps the Cosmo is following the rule: Sell the Sizzle, not the Steak. Or in the case of the Cosmopolitan: Sell the secret pizza, not the generic casino. That is what Gallo did with its Wine Cooler when it put a fancy neck-wrap on the bottle and named the product Bartles and James. One of its advertising copywriters told them there was nothing about the wine cooler itself that made it unique so you might as well make the name and the packaging unique.

The trouble is: How much can they hype the "Experience" and "Ambiance" aspects before people realize there are lots of places in Vegas where you can some really great pizza and lots of places in Vegas with pool tables and fosseball and inviting nooks with soft couches.

Anyone remember that pre-opening video about some casino that featured kittens and chicks in the elevator. I don't remember which casino and I don't remember what that crazy slogan was... but it sure didn't focus on the gambling, it focused on sex and decadence or atleast imagined decadence. Perhaps what marketing is all about these days.

Quote: FleaStiff

The press always emphasizes the decor, the nook and crannies, the pool table, the secret (lol) Pizza Joint, the anatomy of the greeters, the exotic cocktails, that Chandelier bar, the events ... ain't read much about the casino at all. I'm sure they want gamblers there but perhaps it really is an after thought. Its perhaps similar to those pool parties that also offer a bit of blackjack. Clearly the blackjack is just a side line, the real money is made selling outrageously priced booze to outrageously under-dressed yuppies. The Cosmopolitan might be thought of as a pool party without the sunshine and bikinis.

It seems more and more like that in the way that the casinos market themselves. If I go to the website of a casino I haven't visited, first thing I want to know is what table games they have. So I (more often than not) find table games buried three or more clicks away from the home page, and then often there's just a bulleted list of some of the games that they have. I've found myself having to call the place when I've been genuinely interested in what was offered (and then the phone help not knowing what games were available).

Hmm. Nareed's latest Las vegas Law (I'll look up the number later):

Whenever a new business model is found for Vegas, the old business model will undergo a boom.

This one can be tested. Within 5 years the Cosmopolitan ought to be expanding its casino, new themed hotels should be going up or old hotels will be themed, etc.

Of course it's shamelessly stolen from the Paperless Office Principle: Every time there's a trend towards a paperless office, start investing in paper.

Quote: FleaStiff

Of course we don't know if this is what they intended or merely what the gambling public gave them: Gawkers there to "experience the ambiance" or some such thing.

Its like a Bar-Restaurant sort of deal. Does the kitchen support the bar or does the bar support the kitchen?

I think it is safe to say that nobody built these giant resorts thinking that they would earn less money in gaming than some places in Reno NV.

Since January 2008 developers opened the Palazzo, the Encore, The Cosmopolitan, City Center, Westgate Towers in Planet Hollywood, Hard Rock towers, Palm Place, Trump Hotel, Rush Tower at Golden Nugget, M Resort, Third Tower at South Point, new tower at Terrible's and numerous time share towers all over town.

Not to mention Echelon and Fountainbleau, and several other projects that never got shovel in the ground; the largest being The Plaza Hotel (not the old one) .

Now if anyone was worried about gaming not going up enough to cover all these new places, virtually nobody expected gaming to go down.

However, with that said, I would have expected Cosmopolitan to be below average for the strip. Last year the average casino of the 23 large ones on the Vegas strip made $203.5 million in gaming revenue and $322.8 million in non-gaming revenue. And those 23 casinos include a lot of old places.

Instead, the Cosmopolitan gaming revenue is neck and neck with Golden Nugget (for gaming). Why isn't it stealing business from the older places?

	Las Vegas Strip
	MGM Resorts Inc
1	ARIA RESORT & CASINO
2	BELLAGIO
3	EXCALIBUR HOTEL AND CASINO
4	MANDALAY BAY RESORT & CASINO
5	MGM GRAND HOTEL/CASINO
6	MIRAGE, THE
7	MONTE CARLO RESORT & CASINO
8	NEW YORK - NEW YORK HOTEL & CASINO
9	LUXOR HOTEL AND CASINO
	Ceasars Inc
10	CAESARS PALACE
11	BALLY'S LAS VEGAS
12	FLAMINGO LAS VEGAS/O'SHEAS
13	HARRAH'S CASINO HOTEL LAS VEGAS
14	PARIS LAS VEGAS
15	PLANET HOLLYWOOD RESORT & CASINO
16	RIO SUITE HOTEL & CASINO
	Other Corporations
17	GOLD COAST HOTEL AND CASINO
18	LAS VEGAS HILTON
19	PALMS CASINO RESORT
20	TREASURE ISLAND
21	VENETIAN CASINO RESORT
22	WYNN LAS VEGAS
23	PALACE STATION HOTEL (in City of LV)

The resort simply can't be profitable selling food/beverage and rooms. It is just downright impossible. It cost way too much to build.

Quote: pacomartin

Casino revenues totaled a mere $28.2 million compared to casino expenses of $25.0 million.

It costs 25mil to run a casino for one quarter? Isn't that a trifle
high? Thats $275,000 a day.

To give some credit where it's due, I think Cosmopolitan is the first casino that has been able to really corner the two big spending markets in Vegas: The Young, Hip crowd that cares nothing of gambling, and The Gambler.

The YHC: The pool, day/night club, its prime location and swanky look make it attractive to younger people. No, it's not Rehab or Tao or one of the super posh clubs, but it's the most accessible to the everyday person who wants to "Experience" Vegas.

The Gambler: The game selection is decent (not great, but not bad for the Strip), and the dealers are by far and away the friendliest on the strip. Service is good and the player's club did a lot to get new people in the door.

If you think about all the other hotel/casinos, only a few come to mind that have been successful in cornering both markets. Hard Rock specializes, and Venetian offers what is viewed as a premier club. Otherwise, all the others really only cater to one or the other, but not both.

Yes. It seems the casino web sites seem to think it would be a sin to have an easily locatable page showing:

Blackjack: 14 Tables. 3:2 10.00 to 5,000.00.
Craps 4 Tables. 10x, 2,12 in the Field = 2x.
Roulette: Double Green. Roulette usually opens 4:00pm.

Mostly if you click on the table games page you get a picture of a pretty girl throwing a pair of dice and some stirring description of excitement, but no facts about that casino at all.

>nobody built these giant resorts thinking that they would earn less money in gaming than some places in Reno NV.
True. The Mirage opened with a nut of one million dollars a day, but it made two million a day right from the start.

>virtually nobody expected gaming to go down.
Nobody ever does. Until even now.
>Why isn't it stealing business from the older places?
Young Hip Crowd goes to Cosmo, some of whom actually wander into the casino, perhaps by mistake.
The "Older Places" already have established gamblers who are happy enough. Older gamblers "visit" the Cosmo, but don't play there on a regular basis.

>The resort simply can't be profitable selling food/beverage and rooms. It is just downright impossible. It cost way too much to build.
Profits? Its already owned by the bank? It doesn't have to be profitable.

Quote: EvenBob

It costs 25mil to run a casino for one quarter? Isn't that a trifle high? Thats $275,000 a day.

That's a good question. I would say that is not unexpectedly high operating costs for a strip casino with 1500 slots, 77 table games, race and sports. It costs a lot to keep all those tables running. What I would say is that the revenue is very low. Slot machines for that business quarter on the strip averaged $180/day in the major casinos. So the Cosmopolitan's 1500 slot machines could be expected to bring in $24.5 million in the quarter if they were average. Yet the whole casino only brought in $28 million.

Usually a strip casino makes more on table games than they do on slots.

Generally the casino is the biggest money making department in the resort. Look at the following examples-

Casino 2ndQ 2011	Cosmopolitan	ACEP	Wynn Las Vegas	Boyd	Wynn Macau	MGM Resorts worldwide
Revenue	$28m	$51m	$158m	$487m	$924m	$797m
Operating Cost	$25m	$17m	$70m	$223m	$615m	$486m

ACEP runs four casinos- Stratosphere, two Arizona Charlie's, and Aquarius in Laughlin. Together they have 4500 slot machines and 130 table games + poker & sports. The casino department operating cost was $17million but the four casinos brought in almost three times that amount in revenue.

Wynn Las Vegas costs $70 million to run the casino, but revenue was over twice that. Wynn Macau is an expensive casino to run, but it brings in almost a billion dollars in revenue in one quarter. Boyd is running 16 casinos around the country. Revenue is twice operating costs.

Quote: FleaStiff

Profits? Its already owned by the bank? It doesn't have to be profitable.

I can't see Deutsche Bank getting a federal hand out :)

Quote: thecesspit

I can't see Deutsche Bank getting a federal hand out :)

True, but I can't see it foreclosing on itself either.

Quote: FleaStiff

>The resort simply can't be profitable selling food/beverage and rooms. It is just downright impossible. It cost way too much to build.
Profits? Its already owned by the bank? It doesn't have to be profitable.

Maybe I should be more explicit in my terminology. The Cosmopolitan is being run at an operational loss. It is not even making money even before they consider interest. Because it is owned by the bank they are charging almost no interest.

Businesses that can't even run at a positive operational income are in serious trouble!

These high room rates and food sales are not a new way to make money. They are not a viable business.

Quote: pacomartin

The Cosmopolitan seems to have reversed the traditional business model for Vegas.

Net revenues for The Cosmopolitan were $126.1 million in the second quarter of 2011. Food and beverage revenues totaled $70.1 million i, while room revenue was $45.9 million. Hotel occupancy was 91.4 percent and average daily room rate was $246 .

Casino revenues totaled a mere $28.2 million compared to casino expenses of $25.0 million. The property reported a net loss of $54.3 mil.

The Cosmopolitan is continuing development of the West Tower (Phase II), which should be completed by September 2011. Phase II will add 968 hotel and condominium-hotel style units to the Phase I total of 1,998 units.

You state that the casino MADE 3.2 mil - loss leader how?

I stayed at the Cosmo in Feb, right after it opened. It is a fabulous property - rooms are amazing, location is fantastic, pools great, etc.

It is important to note that the 'hotel' rooms were built to be sold as condos so are way nicer than your typical hotel room (complete with dishwasher). This is the real problem - the place just cost too much to ever be profitably run as a hotel/casino. I don't think there is a solution to it other than to do what they are doing and hope for the best.

Perhaps they will eventually sell the "hotel rooms" as "slightly used condominium units" when the economy recovers?

Meanwhile, if its so close that a good hard stare at the numbers could shift things from profit to loss, then its not viable as a going business independent of being owned by the bank that has already foreclosed on the predecessor corporate entity.

Room, Food, Beverage and Casino. Nothing is really generating a substantial profit.

Quote: dm

You state that the casino MADE 3.2 mil - loss leader how?

I called it a "loss leader" because normally a resort makes most of it's operational income from the casino department, while the rooms, food, beverage and entertainment are there to support the casino. At Cosmopolitan it's just the opposite.

Comparing the "department level" revenues and expenses between Cosmopolitan, and ACEP (American Casino and Entertainment Properties) you see what I mean. ACEP owns Stratosphere, two Arizona Charlie's casinos, and Aquarius Resort in Laughlin. If not an "budget" destination, it is at least an "economy" destination.

Department Cosmopolitan	Revenues:	Operating expenses:	Rev-Exp
Casino	$28,192	$25,028	$3,164
Rooms	$45,901	$12,218	$33,683
Food and beverage	$70,130	$50,498	$19,632
Entertainment, retail and other	$6,184	$7,097	-$913
	$150,407	$94,841	$55,566
Less — promotional allowances	-$24,299
Net revenues	$126,108	$94,841	$31,267
Department ACEP	Revenues:	Operating expenses:	Rev-Exp
Casino	$50,700	$16,600	$34,100
Rooms	$16,900	$8,900	$8,000
Food and beverage	$17,500	$13,200	$4,300
Entertainment, retail and other	$8,200	$3,000	$5,200
	$93,300	$41,700	$51,600
Less — promotional allowances	-$5,800
Net revenues	$87,500	$41,700	$45,800

So despite much lower revenue, ACEP has more money coming out of it's departments. Now both companies are losing vast amounts of money. Cosmopolitan has a large back office, a lot of depreciation and general and administrative expenses. It's running a huge operational loss. Right now it doesn't pay much interest since it is owned by the bank.

ACEP pays a huge amount of interest since it was bought for a premium price in 2008 by Goldman Sachs. Once again they are doing their own financing so a lot of it is covered up.

My bottom line is that Cosmopolitan may be very chic right now, but as a business it is losing a fortune. It bothers me that the newspapers can't seem to make that clear. They go on and on about how much food they sell, and how high priced and wonderful the rooms are. Sometimes it is referred to as the Vegas of the future. That may be true, but as a business model they are in serious trouble. You would be better off owning Circus Circus.

Why is the Cosmopolitan giving away $24.3 million in promotional expenses? The casino only made $28 million. Las Vegas Sands only gave away $16.9 million in promotions last quarter, and their Vegas casino made $105 million. That level of promotions makes almost no sense.

It's almost as if the company is trying to make the property look as fabulous as possible in the hope that someone will by it.

Quote: pacomartin

You would be better off owning Circus Circus.

No. Circus Circus is an aging property and gets bad publicity all the time. Cosmopolitan is a new property and gets good publicity which can be hyped and whipped into "assets" and then sold, spun off, taken private, LBO'd or something.

.....

Quote: gofaster87

Funny how I hear the opposite from people I know going to the Cosmo. I hear its over hyped and not worth the bother or money. Its an over rated amusement park for yuppies that has inexcusable overhead. That place wont turn a profit for at least 10-15 years if it ever does.

Perhaps Circus Circus is a bit of a stretch. How about the eight year old Borgata, which no one seems to want to buy the 50% share from MGM-Resorts. Look at how much better the Borgata bottom line is compared to Cosmopolitan. Both resorts currently have about 2000 rooms.

The Borgata has about half the food sales of the Cosmopolitan, but people actually gamble there. The casino department is very profitable.

Note that the operating expenses are about the same for both resorts. Borgata giving away $56m in promotional expenses seems to make sense given the size of the earnings from the casino.

Cosmopolitan	Revenues:	Operating expenses:	Rev-Exp
Casino	$28,192	$25,028	$3,164
Rooms	$45,901	$12,218	$33,683
Food and beverage	$70,130	$50,498	$19,632
Entertainment, retail and other	$6,184	$7,097	-$913
	$150,407	$94,841	$55,566
Less — promotional allowances	-$24,299
Net revenues	$126,108	$94,841	$31,267
Borgata	Revenues:	Operating expenses:	Rev-Exp
Casino	$162,138	$65,449	$96,689
Rooms	$29,817	$3,753	$26,064
Food and beverage	$37,058	$18,031	$19,027
Entertainment, retail and other	$10,596	$8,782	$1,814
	$239,609	$96,015	$143,594
Less — promotional allowances	-$56,853
Net revenues	$182,756	$96,015	$86,741

Pay special attention to the fact that both resorts make the same amount from their food and beverage department. While Cosmopolitan sells a lot of higher quality food and drinks their costs are much higher. That's part of the problem with trying to make money on food.

As always the above figures are for 2nd quarter 2011.

I happened to be at Cosmo the beginning of the weekend of Electric Daisy Carnival and the Paquiao/Bradley fight. Place was PACKED. The best eye candy you've ever seen in your life, between the EDC freaks and the Cali nightclub crowd. Now I know where all the business from Hard Rock and Palms has gone (the fickle in-crowd). It wouldn't surprise me if they were completely sold out for the weekend. I was very disappointed in the gambling offerings, as they have gone to 6:5 payouts on all their single-deck and double-deck games. Spanish 21 has the bad rules, and Ultimate Texas Hold 'Em was at $25 minimums (yet a full table, WTF?). The 6 and 8 deck BJ games do not offer surrender while right next door at Bellagio you can find better rules. I think they did have single-zero video roulette, although that may be faulty memory.

This appears to be in perfect alignment with the Cosmopolitan's goals. They never really wanted gamblers, never advertised to them, never depicted a solitary casino scene in their ads, never showed anything but "glitter for the glitterati". Come, be beautiful, relax, dine, rent a room, get followed down the hall by a dozen live chicks, be naughty but be elegantly naughty ... and call us The Cosmo but never call us the Cosmo Casino because we are not a casino we are a sinfully naughty but elegant experience.