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Best of Liz Benston

Gaming Guru

Liz Benston
 

Cheap rooms could sell casinos short

23 March 2009

LAS VEGAS, Nevada -- A business model gaming companies have followed for decades has turned into a precarious balancing act, as casinos slash room rates to levels not seen in more than a decade.

Cheap rooms have been a fail-safe way for gaming chiefs to fill their casinos with gamblers and keep profits up in down economic times. But some Strip resort operators are learning that cutting room rates in this economy can take a greater toll on the bottom line than having fewer gamblers at the slot machines.

Recent earnings reports from MGM Mirage — a barometer for the overall health of the Strip — show as much. The company's budget and mid-level properties reaped big returns from inflated hotel rates during the boom, but those properties' lower room rates are now dragging down the company's profit margins.

In an interview last week, MGM Mirage CEO Jim Murren said about 70 percent of the company's decline in year-over-year earnings in the fourth quarter resulted from lower room revenue and profit.

Every percentage-point drop in hotel occupancy costs the company $3 million in profit per month. At the same time, every $5 reduction in average hotel rates costs nearly $6 million in profit per month.

"There's an enormous amount of operating leverage, positive or negative, because of the rooms department," Murren said.

Murren said the company is doing its best to maintain rates where it can and hoping for slight rate increases based on improved business trends, which would allow lost profit to flow quickly to the bottom line once again.

Experts acknowledged that resort executives don't have many options in this economy. However, they cautioned that sacrificing room rates to boost occupancy is a tricky balancing act that can backfire the longer it persists.

"They're getting a low return on their investment," said Tony Henthorne, chairman of Tourism and Convention Administration and the William F. Harrah College of Hotel Administration at UNLV. "But that's a little bit of money versus no money. The whole idea is to get bodies in rooms and guests who spend money on other things."

But the longer the price-cutting continues, the more damage that is done to a company's brand and the more difficult it will be for rates — and profits — to return to pre-recession levels, Henthorne said.

Maintaining prices, what the hotel industry calls "price integrity," allows hotels to recover more quickly when the economy turns.

That will be key for MGM Mirage, which could recover lost earnings rapidly with incrementally higher rates.

Complicating the situation are discounted room rates at new high-end resorts, which limit the ability of competitors to charge more for rooms, experts said.

Encore, which opened in December billing itself as the most luxurious casino resort in Las Vegas, is offering discounts. It opened with rates as low as $150 per night and now advertises a rate of $159, with a two-night stay earning customers a $50 credit toward other purchases.

Customers are more likely to patronize higher-end properties at bargain rates than save a few dollars by staying at a budget hotel, experts said. Moving up the luxury scale is especially easy to do in Las Vegas, as the competition is concentrated on the Strip.

This trend appears to be playing out at MGM Mirage, which owns most of the big casinos on the Strip as well as the largest variety of properties, including the budget Circus Circus, mid-level MGM Grand and luxury Bellagio.

The Bellagio, the company's most luxurious property, maintained 93 percent occupancy in the fourth quarter, down less than a percentage point from a year ago. Meanwhile, the other properties had double-digit declines.

The current struggle to fill rooms is a shift for Las Vegas, where casinos historically operated at more than 90 percent occupancy. (Most cities are happy with occupancy rates of 70 percent or 80 percent.)

In January, Las Vegas Valley hotel occupancy averaged 76 percent with a nightly rate of $104.89, after peaking at $146.53 in April 2007, according to the latest survey by the Las Vegas Convention and Visitors Authority. The authority does not break out Strip results.

For now, pricing rooms remains tricky.

Business from meetings and conventions, which accounts for about 20 percent of MGM Mirage's room bookings, has seesawed over the past few months. There were cancellations and lower attendance immediately after the Wall Street meltdown and the recent criticism of Las Vegas business travel from politicians, but those dips were followed by some recovery, Murren said.

Among tourists, business slowed in January and picked up in February and March, he said.

Murren predicted declines in room rates will depress MGM Mirage's revenue per available room for the quarter that ends March 31 compared with last year.

"We're trying to (lower rates) without degrading the brand," he said.

Cheap rooms could sell casinos short is republished from Online.CasinoCity.com.