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Rod Smith
 

Room Rates: Recipe for Just Desserts

12 December 2005

Back in the days of Bugsy Siegel and Benny Binion, it was probably simple to set room rates: $29 a night gets you a room, $39 a suite. Build it and they will come.

But it's not simple anymore, especially for MGM Mirage, which owns the most hotel-casinos (12) and the most resort rooms on the Strip (almost 40,000).

Las Vegas casinos' sharp turn toward dependence on entertainment revenues and away from gambling was meant to buttress business, but it vastly complicated hotel room and rate management.

MGM Mirage executives compare setting room rates to baking three-layer cakes with lots of frosting every day. But unlike pastry chefs who can use consistent recipes, room-setters' cake mix changes constantly; they must alter the thickness of each layer and the frosting every day.

Free-and-independent travelers are the frosting; each cake layer represents another market segment: leisure travel, often group business; convention business; and casino business.

An executive at The Venetian who asked not to be named because of the competitive nature of room pricing, said nothing messes up everybody's cake like entertainment events.

"A big concert comes to the Hard Rock (Hotel), and they're not going to give up all their rooms to concertgoers," he said. "Plus, you have party-givers and goers who want to do their things at their favorite hotels.

"Conventions book a year ahead, and all of a sudden we have favored guests we have to accommodate or who cancels out. That's the icing on the cake, but it can get awful thick or awful thin awful fast," he said.

Deutsche Bank analyst Andrew Zarnett said MGM Mirage has a sophisticated yield-management program that lets it get the highest total return for every room it offers. MGM Mirage needs this program, he suggested, because of the size of the company's room inventory and the variety of customers the company serves.

"Yield management in the casino business looks at the total spent," he said. "MGM (Mirage) has worked out a system for selling on the basis of total revenue generation across a broad range of products. It's really a casino management system, a yield management program for all the properties."

Paul Berry, vice president of hotel operations at Bellagio, said the MGM Mirage yield-management system is a tool that gives decision-makers the best possible information to make rate decisions and achieve that last-best yield.

"It doesn't set rates," he said. "Human interpretation, subjective judgment, is the most important thing. Decision-makers understand the goals and outside influences.

"Each day we spend several hours analyzing demand," Berry added. "Each arrival day is its own story, especially since things are always changing."

Berry said the trick is to let each market segment run with enough inventory.

"There's not an equal or the same distribution any day of the week. Then you have to make sure the delicate balance doesn't go off-keel," he said.

Long before any check-ins appear, each of MGM's 12 properties work with wholesalers to package rooms with airfares that help market rooms globally and create predictable occupancy rates.

Rooms for conventioneers are sold as parts of packages by properties independently, with demand varying from Mandalay Bay to Treasure Island, depending on the meeting space each hotel offers.

Similarly, demand for rooms from casino customers varies property to property, depending on the size and class of the casino.

"What is left to manage is the FIT (free-and-independent traveler) business, the cream of the crop," he said. "The (underlying) demand from the others helps us yield up (or increase the financial return) for the properties."

The mix will vary sharply, from The Venetian with its convention center, to Bellagio, even though rates may be similar, said Fletch Brunelle, MGM Mirage senior vice president for hotel sales.

The Venetian, owned by Las Vegas Sands Corp., is considered a close competitor of Bellagio.

Brunelle said part of the equation for maximum room revenue is attracting top entertainment headliners such as Paul McCartney, U2 or the Rolling Stones.

"We want maximum revenues in the hotel-casino that weekend," he said.

MGM Mirage spokesman Alan Feldman was critical of Wall Street surveys that poll hotel-casinos to determine the rates they are charging.

He said the surveys only check rates two days a week for the free-and-independent traveler market segment. Hotel-casinos, though, sell to four market segments seven days a week.

Feldman also said room nights are perishable products, and cannot be sold to manage long-term yields on a year-over-year basis.

However, Zarnett, Berry and Brunelle acknowledged that over time, Wall Street surveys have accurately reflected broad trends in room rates charged for Strip properties.

Volatility in rates, which was rampant at the beginning of the summer and seems to be creeping back as the holidays approach, comes from changes in the mix of market segments, he said.

"A convention or entertainer can fall out or a boxing match can be added," Berry said. "And sometimes demand -- what you thought would happen -- just didn't hold true.

"In our meetings, any given day of volatility doesn't make a trend. Volatility comes in when you don't think the glide pattern is coming in right," he said, comparing MGM Mirage's yield management systems to the seat-pricing programs airlines operate.

The pastry-chef analogy may make setting room rates seem simple as baking a cake, but these experts agreed setting room rates is high-tech, run by computerized, sophisticated technology.

"World-altering events may change your goals, (as did the Sept. 11 (2001) terrorist attacks when the bottom fell out of the hospitality business), but otherwise it's like sailing a supertanker through a marketplace," Brunelle said.

"Situations can change on a dime, but you'll have to turn the ship (slowly). The goal (of reaching port) doesn't change and our goal still is to sell out."

Room Rates: Recipe for Just Desserts is republished from Online.CasinoCity.com.