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Liz Benston

Casinos face dilemma in struggling economy

1 December 2008

LAS VEGAS, Nevada -- Throughout this downturn, big Strip casinos have kept hotel occupancy high by cutting room rates and offering discounts and other promotions.

But this volume-driven strategy has a key weakness.

In recent months, the profits of several big casino operators have fallen faster than revenue, or total sales before expenses. It's a sign that the companies have not cut costs deeply enough to offset the decline in their business.

On the Strip in the third quarter, MGM Mirage's revenue fell 9 percent, and earnings declined more than 15 percent over the same period in 2007; Harrah's Entertainment's revenue declined 12 percent, and earnings fell 17 percent over the same year-ago period.

Typically, businesses with declining revenue cut expenses by a similar percentage. But that's difficult for big hotels attempting to fill their rooms. They still need armies of thousands to staff and maintain their properties even if customers are spending less.

A big part of ongoing cost-cutting efforts at MGM Mirage and Harrah's involves eliminating middle management positions rather than the rank-and-file jobs of employees who interact with customers. Both companies are also attempting to operate more efficiently at every level of their businesses by negotiating more favorable contracts and consolidating departments, among other things — efforts that weren't a priority when times were good.

Laying off rank-and-file workers is the quickest and easiest way to cut costs. That's been a last resort, however, because Strip casinos are having a difficult time predicting how well their discounts, special events and other offers will do at luring fickle customers during these troubled economic times.

As an alternative, more casinos are turning to technology, such as kiosks and marketing software, to reduce labor costs. It's a strategy manufacturers have used for years.

Some casinos have reduced entertainment schedules and closed or reduced hours at restaurants.

A worst-case scenario would involve taking underused rooms and gambling areas out of service if they become too expensive to maintain. That is happening at Buffalo Bill's, a casino in Primm where hotel rooms are unavailable Mondays through Thursdays through December.

Experts at last month's Global Gaming Expo trade show and conference said casinos could be forced to take more drastic actions to cut costs as the economy worsens.

At the conference, New Jersey-based gaming consultant Cory Morowitz recommended contingency plans such as more flexibility in staffing ratios and union contracts.

Some cost-cutting options might be obvious yet overlooked, he said. At one major casino, a manager investigating the source of a vendor's fruit basket discovered a copy machine in every office, he said.

Casinos are bracing for some tough weeks ahead as they await New Year's Eve, the biggest event of the year in Las Vegas. In recent months, some indicators such as gambling revenue have fallen more dramatically than after 9/11, which posed more of a transportation problem than a demand problem for Las Vegas casinos.

This broad consumer recession has made Americans cautious about spending. Tourism volume and spending are down despite falling gas prices.

As executives try to balance cost cutting with providing service, they are wary of creating an earnings free fall like the one at the Tropicana Atlantic City, where staff cuts went too deep based on a faulty analysis of the resort hotel's needs, Morowitz said. The Tropicana had expanded over the years, requiring more staff than neighboring, more efficiently designed properties.

The message is clear, Morowitz said.

"Companies must design operating and capital flexibility into their strategies in order to react to the next 100-year event," he said.