2010 Gaming Industry Forecast

According to Robert Allen, corporate VP of slot operations at Grand Casinos, “If nothing else, 2009 was a year that sledge-hammered home one agonizing message loud and clear: The good old days as we have known them are over.” And how. We are all well aware of the economic woes Allen’s referring to, but here’s a quick refresher for those of you who may have been hiding in your corner office with your eyes squeezed shut and your fingers in your ears for the past 12-plus months. 2009 brought us, among other financial maladies, two quarters (Q1 and Q2) of continuing consecutive decline in the GDP, including the steepest drop since 1982; a 20 percent loss in the Dow Jones Industrial Average over a span of just six weeks, bottoming out with a 12-year closing low of 6,547.05 in March; and a 10.2 percent national unemployment rate in October, which is holding steady in the double digits as this issue goes to press. 2009 also brought irrefutable evidence that, contrary to the common wisdom, gaming is not recession-proof. Everything from consumer spend per-visit to hotel room occupancy is down, not to mention all the stalled projects, scrapped expansions and bankruptcy proceedings. Even G2E, the flagship trade show of casino industry excess and advancements, was noticeably smaller and more subdued. From small Indian casinos to the Las Vegas Strip, the gaming industry is, if not outright suffering, slogging along for the first time ever.

Gaming cornerstone Nevada is saddled with what may be the worst of it, as Nevada Gov. Jim Gibbons reports 33 consecutive months of decreasing sales tax revenues, 27 consecutive months of decreasing adjusted average daily gaming drop, the highest foreclosure rate in the nation, and the second highest unemployment rate. But few gaming jurisdictions across the nation are immune to the recession. Even healthy holdout Pennsylvania, which posted a 32 percent gross gaming revenue growth for October 2008 to October 2009 and opened three new casinos in 2009, might finally be feeling a bit of the crunch; adjusted for new properties, November’s month-to-month growth was only 1 percent. And unfortunately, despite signs of overall economic recovery on the way, smart money says gaming will not rebound quickly—Frank Fahrenkopf, president and CEO of the American Gaming Association, reports that “economic indicators portend a slow recovery for consumer-driven industries like ours.”

Managing Director at WhiteSand Consulting Saverio Scheri, agreed: “While we should see the start of an economic recovery in 2010, I believe that we have come to realize that we’re not going to wake up one morning and everything is back to pre-2007 numbers. It will be a slow rebound that will take years—and many industry executives feel we will never see pre-2007 revenues again.”

This is largely because the gaming industry relies on discretionary wallet—and a few big spenders—and in the past few years, consumers have changed in profound and possibly permanent ways. Some argue it’s a temporary reaction to lost wealth or the result of higher housing, medical, education and child care costs, and some argue it’s a real psychological shift calling them the “New Frugalists,” but the short-term result for the casino industry in 2010 will likely be the same: players buying in for fewer chips and feeding fewer bills into slot machines. Someday these consumers might decide more of their dollars are disposable after all, but for now they are spending less and saving more. They’re also bargain hunting more than ever. This make-me-a-deal mentality is a far cry from the just-charge-it attitude of even just a few years ago, when the national savings rate was actually a negative number and personal spending soared, and it’s a trend that may be impossible to reverse.

Chuck Hickey, vice president of slot operations at Barona Casino, said casino customers will now scoff at the thought of paying full price. “Many operators re-trenched in 2009, returning to what they do well,” he said of all the pricing reductions, deals, promotions and room rates that properties were using to attract their players back. “Those players won’t forget those deals they got in ’09, and their expectations will be higher in ’10. I don’t believe you are going to be able to forget about those prices and increase rates, no matter what the economy does.”

He added that operators need to remember that focusing on their product is also a key to their success and “hopefully they haven’t abandoned training their staff and [are] focusing on service.”

While players have always loved a deal and a personal touch, their demographics are also poised to make a major shift over the next decade, as Generation Y turns 30 and increases its earning power. Raised on video games, computers and cell phones, the gamers of this generation are used to the best of the best when it comes to graphics, sounds and entertainment value, and they aren’t likely to settle for less at the casino … heck, even the Gen Xers and the Baby Boomers appreciate the appeal of ultra hi-def and 17-speaker surround sound. In other words, to continue to grow and maintain their customer base, casinos will need to catch up with the cutting-edge technologies that drive other entertainment industries—and quickly. “Operators realize that they face an incredibly competitive entertainment marketplace, where they are competing for entertainment dollars with movies, live theater, home computers, video games and more,” said Lyle Bell, board chairman of the Gaming Standards Association. “Some recent research tells us that less than 10 percent of Americans consider gaming a legitimate source of entertainment, which makes our competition that much more intense. That being said, we at GSA forecast that 2010 will be the year that the operations side of the gaming industry embraces technologies that will help it catch up to and compete with other entertainment offerings that consumers participate in at a high frequency.”

Server-based gaming is just the start, with many gaming manufacturers making gains in promotional couponing, community gaming and even iPhone apps. And even these behind-the-casino companies are making more effort than ever to appeal to more players. “For those who walked the floor at the recent Global Gaming Expo (G2E) in Las Vegas, it was quite clear the ‘good product offerings’ piece of the puzzle will not be a problem in 2010,” noted Marcus Prater, executive director of the Association of Gaming Equipment Manufacturers, “nor will the simple determination from those who will offer up these products to willing customers. If anything, the main problem with 2010 may be too much of a good thing.”

Too much gaming, however, may be just that, as many states turn to gaming to prop up overextended budgets, once again leaving it to individual casino properties to scramble for customers. “In order to create the market demand for all of these gaming positions, casinos will need to reinvest in their properties and try to expand the market by attracting never-before gamers …” Scheri said. “More than just facelifts, casinos will need to reinvigorate their non-gaming amenities or add to their offerings in order to provide a complete experience rather than just a limited encounter.”

Of course, it’s a Catch 22 in a tight credit market, as many casinos may not be able to access the funding necessary to renovate—they need players to earn money, but they need money to attract players … both of which are hard to come by these days. Scheri predicted that “the successful properties will be the diversified casino resorts and smaller boutiques that can attract a wider cross-section of the general market,” but what will become of the rest? Jim Roets, senior vice president of gaming at Reno’s Grand Sierra Resort made his own grim, but realistic, prediction: “Regrettably, there are probably more bankruptcies, more restructuring, and closures on the horizon. It is complicated and unpleasant. As gaming industry professionals, we hope the tide will turn soon so increased revenues can be enjoyed by everyone. Most predict this will take three to five years to happen.”

A silver lining to increased competition, however, is that it is not as bad as it could be. With anti-Unlawful Internet Gambling Enforcement Act champion Rep. Barney Frank (D-Mass.) preoccupied with the economy, Internet gaming might not return as a threat to bricks-and-mortar casinos for a few more years. “With Democrats firmly in control, Frank could do it, with his position as chairman of the House Financial Services Committee,” explained gaming law professor I. Nelson Rose. “But, even though he has scheduled hearings, his main concern has to be keeping the U.S. out of another depression.”

It might be a stretch to celebrate this, but it is a heartening reminder that everything could be much, much worse (knock on wood). After all, the Dow and the GDP are back on the rise, inflation is under control and Black Friday wasn’t a total bust. And, like the casino players who always feel that big win coming, however, optimism seems to be winning as the dominant outlook for 2010. Gordon Kanofsky, CEO and vice chairman of Ameristar Casinos, captures the spirit of the New Year well as he reflected on the past without regret and fearlessly looks forward to the future. “More than anything, we hope that 2010 brings an increase in customer spending along with a turnaround of the economy and credit markets,” he said. “We want our guests to be comfortable enough to travel and spend more on entertainment. We count our blessings that throughout 2009 our guests have continued to rate us high in customer service and quality of facilities, and we will continue to focus on maintaining and even exceeding that same quality of excellence in the next year.”

So, as we finally close the chapter on 2009—or slam the book and burn it—all indicators point to recovery for the economy, albeit a slow one. Our challenge now is to learn from our mistakes—and not repeat them—as we move forward into whatever 2010 and the decade ahead may bring.

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