by Howard Jay Klein
"For want to a nail a shoe was lost;
For want of a shoe the horse was lost;
For want of a horse the battle was lost;
For the failure of battle the kingdom was lost"
Old proverb linked to Shakespeare's Richard 111
"It's as American as baseball and apple pie," goes the old saying. And you might add free parking in Las Vegas to those most American of all virtues.
Last week, part of that assumption was exploded when MGM announced that beginning this April it would begin charging for day and overnight parking at its nine strip hotels.
The statement had all the portent of the heretic proclamation, God is Dead, given the outraged reaction to the idea among Vegas locals. The news went viral in social media and MGM CEO James J. Murren had to acknowledge in the aftermath that he had never anticipated the "velocity and venom" to which the company's policy announcement had been subjected. The move could bode dangerous far beyond the locals business. It could shake up the entire Las Vegas revenue paradigm.
Adding he wasn't tone deaf to the raging protests, Murren reiterated that the company planned to forge ahead with the plan and that the policy change was part of its $90 million parking strategy, which will include a new 3,000 space garage to service its entertainment venues.
He also confirmed that the new parking charges would not only apply to day trip locals but also overnight visitors, who would get hit with a projected $10 a night fee both for valet and self-parking. It was that part of the anticipated policy that raised the eyebrows, hackles and hard questions among many strip competitors. Reactions we got from industry colleagues ranged from "utterly dumb" to "ballsy" to "a long past due recognition of reality."
Yet no competitor was talking on the record as to how the policy might shake up the revenue and competitive matrix of the town.
Give Murren credit for courage.
Free parking in Las Vegas and most casino venues in the US is deeply rooted in the DNA of the industry. It was born on the operating assumption that anything management could to encourage visitation should be employed provided it met the simple test of relative cost. In other words, to us in the industry, free parking was always looked upon as one of the cheapest and most productive comp costs available.
But given the skyrocketing cost of building elaborate garages, staffing valet functions, lighting, security -- you name it -- has been the subject of debate among industry professionals for years. Murren told reporters that MGM spends $30 million a year to maintain its 37,000 parking facilities. "The question was do we continue to have parking be a loss-leader? We took an amenity that had been free for decades and decided to charge for it. We knew that would cause a tremendous amount of discussion," he said. Let's call his use of the word "discussion" the euphemism of the year. An explosion of anger is a lot closer to the truth.
Thus far MGM's strip competitors have assumed a silent waiting stance. Murren chided his competitive brethren by adding, "Frankly, they are sitting back and letting MGM take the heat on this."
I had participated in many of those paid parking meetings myself back in the day, some of which dragged on for hours through mind-numbing slide and later, power-point presentations. The parking cost parameters, as Murren suggests, are very real. Yet it was clear at least in the '80s and '90s in Atlantic City that Harrah's huge garage at its Marina property offering free parking was probably the single most productive asset the property had in terms of producing a slot win number that lead the market. That was why despite the apparent financial virtues of imposing parking fees, we all shied away from paid parking on the boardwalk as well.
During one such two-hour marathon at Caesars, I turned to my conference room colleague, an executive from a competitor and said, "Do you get the feeling we can be sitting here until we're all skeletons still debating whether to charge for parking?"
It's not that we didn't recognize the bad economics of free parking. It was just that it was beyond doubt too that free parking, particularly self-parking, was a vital component in the perception of players - the minimal cost of which notwithstanding. Eventually, AC succumbed to a $2 city mandated fee, which of course, was used as a phantom comp and eventually offset by the properties anyway through various marketing ploys.
Murren later said the plan needed fine-tuning and lots of detailed further study. Also evaluation as to whether parking fees would be uniform or whether they would vary according to the demos each property attracted. The entire plan was the result of a two-year study by MGM that in its view had shown that parking per se had not kept pace with the development of other amenities of the business. "The company is investing $90 million in upgraded parking facilities that will include new technologies that enables visitors to check space availability," Murren said.
Will this ignite a parking war?
Assuming the uproar does not cause MGM to renege on its pay for parking decision and it does proceed to implement it, how could it impact the revenue and profitability of the company's nine properties, and furthermore, could it drive droves of customers into the arms of competitors? And if enough patrons defect, but the company decides to fight on, could this one decision have a devastating impact on MGM earnings going forward?
It's one long leap between instituting a nominal parking fee to a hit on corporate earnings. Yet it is one of those presumably small decisions that can rapidly escalate and trigger a series of events, that in the end produces an earthquake. Let's call it a clear test of chaos theory. In any event, investors and potential investors in the shares need some perspective.
"We are not a civic enterprise," Murren said, alluding to the fact that events at MGM properties attract huge crowds that benefit city and county tax coffers. MGM has not asked Clark County to contribute anything to the parking upgrades it plans that clearly benefit locals, as both employees and taxpayers.
Of course, he is right. Yet it's ironic, especially for a company that has long prided itself on its high marks for corporate citizenship. At times, Murren's initiatives in the public arena appear as much a part of helping hand government policy as anything official. Yet in the pay for parking decision, he sheds MGM's angelic citizenship clothes and dons the more practical reality of a free enterprise first mentality. Good for him.
But what could it really mean to the average drive-in customer from California or any nearby western states?
To really understand how this seemingly small and to a degree, logical extension of how Vegas makes its money these days, we need to first peer into the psychology of visitors to gambling venues.
1. Most Vegas visitors, be they gamblers, weekend getaway people, or conventioneers, usually arrive with a fairly good idea of how they'll budget their stays. So much for meals, shows, and of course, gaming. In the totality of the number arrived at it would appear that adding $20 to $35 for parking to an overall budget of $600, for example, should be no big deal. And it isn't - except that it faces the exact same customer psychology as websites. Once people are accustomed to getting something for free, they strongly resist having to pay anything at all for it.
In effect, what Murren is doing is seeking to monetize parking.
The price requested may be inconsequential, but the idea isn't. Just imagine if Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) announced that given the immense value of its service, starting this April, it would begin charging a nominal monthly fee to all its users. And in the aftermath, Microsoft's (NASDAQ:MSFT) Bing decided to remain free. What's your bet as to how long Google's dominance in its billions upon billions of daily hits would remain unscathed? What would happen to its advertising business model?
To some extent, we are dealing with the same consumer psychology here.
Above everything what MGM strategists have to consider is this: What if once its pay to park policy goes into effect, what if its key competitors stood their ground and continued to offer free parking? Imagine this line tagged to all billboards, websites, and media ads of MGM competitors: AND HERE, PARKING IS STILL FREE!
So unfolds a policy. Financially sensible for a corporation on its face, becomes a potential marketing hammer competitors can use against it. One can easily argue naturally that anyone determined to visit an MGM property for a specific reason would not be deterred by a parking fee, be it paltry or not. But push the notion further: What does MGM offer that no peer competitor does not to the degree that could overcome the patron consternation factor of the parking fee?
Here's apples to apples:
1. All comparable Vegas peers offer essentially the same gaming experience in slots and table games. Nothing on any casino floor is proprietary.
2. All peer casinos offer the same basic dining matrix comprised of 24-hour coffee shop, deli, buffet, and the core gourmet room cuisines: Italian, steak house, Asian, seafood.
3. All peer competitors offer pretty much the same size standard rooms priced from a low to high end targeted market segment with a few exceptions.
4. All peer competitors offer entertainment in showrooms, lounges or arenas. The difference of course lies in the acts themselves, which do attract specific audiences of fans. However, aside from the super-loyal fan base a given act may attract, don't the majority of Vegas visitors access shows as largely interchangeable? According to my experience and opinion from a cross section of MGM competitors, entertainment departments, and ticket personnel I've polled, people are flexible. "Most people come to see a show. The diversity and palette of acts is so tremendous here that people happily substitute if shows are sold out, or other properties present acts they enjoy as well," said one entertainment director. "There is no question lots of people won't let a parking fee dissuade them if they are determined to see a particular act. Look, they're shelling out a few hundred for the tickets, a few bucks for parking will be annoying - but not a stopper. But that's fans and the majority of people who come here for shows come for just that, 'shows' in the generic, not the specific sense."
Free Parking as a marketing tool against MGM
From a financial perspective, all strip properties and casino hotels everywhere would love nothing better than to add millions to their bottom lines by charging for parking. No matter what MGM's numbers show as to costs - and it is correct in its assumptions - if parking fee income gains acceptance, it figures to be a high margin revenue stream. Clearly the policy idea stems from the Profit Growth Program project announced earlier this year by MGM as a strategy quite simply to dramatically improve EBITDA by skillful cost cutting.
However, by moving ahead with it after considering all the possibilities, is MGM putting a powerful marketing tool in the hands of competitors who stick with free parking? There is a shoulder shrug aspect to the question: Who cares? What are we talking about? How is a few lousy bucks a car going to disrupt a $10 billion company? Smaller decisions have had bigger consequences, i.e., smoking section conversions on the casino floor. Properties took an initial hit that lasted so long, they had to drop it or replace it ever so slowly, eventually losing as much as 7% of revenue. Macau currently faces the same dilemma, with some analysts forecasting as high as a 10% revenue hit. It's not a perfect analogy but in the large scheme of things, it speaks volumes about casino customers: They are not standard vacationers or tourists. They are a breed unto themselves.
The fees charged in other destination markets was apparently a lynch pin of the decision. Here's Murren: "In Los Angeles, for example, valet parking averages $35 a night and self-parking is $22 a day. Phoenix averages $25 a day for valet and $15 for self-park." That's a poor comparison, in my view. Although MGM has indicated the anticipated fees would be lower in Vegas, it's still operating in wishful thinking land. You might as well cite New York, where the price of parking starts tipping close to $100 a day/overnight. Major tourist metropolises or resort areas are not Las Vegas. The demos skew somewhat differently, the visitation motivations are different, the economic matrix contains gambling.
Destination resort hotels like those in Florida, California and Phoenix impose daily parking charges like those cited by MGM. The charges are seen as an overall budgetary expectation that visitors see as fixed. In other words, you visit a top resort hotel in Florida, you calculate the per day cost of the room, you figure the menu prices of the hotel and local eateries are all on line, plus other amenities like spas, massages, pool facilities. All are plainly evident up front. And people who visit them still complain when hit with daily parking and the constant need to tip the valet parking personnel every time they want to leave the resort premises to go out to shop, sight-see or visit another hotel. Gaming budgets are a totally different animal. Nobody really knows the dollar outcome until they climb back in the car for the long ride home.
Patrons generally do establish a "budget" for gaming before they leave home. And many do stick to it. But many, many others do not. It depends on your luck. Just watch the activity at the ATM machines on any casino floor. Those lines contain many people who have established budgets and gone over them by hundreds of dollars. What happens in real life is something casino owners have recognized for decades: A trip to a casino is usually a what the hell, you only live once decision. And emotions generated on the casino floor can translate into budget decisions and resentment, especially after losses, for the smallest costs. And wins likewise are emotionally charged, sometimes spurring players to bury a percentage as untouchable case money, other times seeing winnings a "house money" and playing it strongly.
I've watched it close up for 25 years. And from that mindset flows what clearly will be a demand to have small charges like parking comped. If that's the case, and MGM in the end, winds up comping a good deal of its potential parking revenue, was it worth all the fuss in the end?
Putting a potentially powerful marketing tool in the hands of its competitors such as a defacto "comp" of free parking for everyone from the local penny slot player to the grumpy three-night tourist with a big REVPAR potential is something MGM clearly contemplated. Can its decision immediately start chipping away at MGM's vital strip revenue base? Or will it be the mouse that roared? Will grudging acceptance by patrons trigger a rapid adoption of the policy across the entire Vegas operating property spectrum?
Here's our best guess now: If MGM doesn't walk back its decision between now and April and does bite the bullet, it could result in a) A net loser when lost revenues are laid against fee income and back off it completely as a bad decision. b) Trigger a fig leaf solution whereby the policy stays in place but a hefty percentage of customers wind up getting their parking comped anyway.
Conversely it could become: a) brilliant call on the inherent docility of the average Vegas patron who will swallow it with a shrug, park the car and get on with the fun, or b) A new vein for the entire Vegas market to mine and thus plump up EBITDAs all over the strip. If that happens, MGM will be owed a long, deep bow by its competitors.
What does this parking policy initiative tell us about MGM's concept of its business model?
More and more with every major strategic move MGM is telling us that it sees itself as an operator of entertainment resorts - not a narrow casino business. It is building arenas and new properties stressing entertainment. It points to its fine performance in non-gaming as a standout contributor to EBITDA. And clearly, its proposed conversion of its realty assets into a parent-controlled REIT tells us it also sees itself as a realty company.
But the facts tell us otherwise. Gaming still represents the core engine of MGM and all its peers. No less a figure than Steve Wynn himself in his recent critique of China's officialdom's ambivalent policies toward gaming, stressed the fact that non-gaming attractions were great without doubt. But no matter how compelling they are, in the end "gaming is the engine."
And whether it's the stream of locals who regularly patronize casinos yelling foul, or overnight tourist gamblers, the clear fact remains that on average, casino amenities are viewed as fungible. MGM needs to take a very hard look at any crunched numbers that suggests the move to paid parking can be a net revenue generator when an estimated loss of impulse as well as tourist business can't be baked into the forecasts until after the fact. Sub-prime mortgages made lots of assumptions about the necessity of even marginal homeowners to pay each month. See your local dumpster for all the fancy decks on those presentations.
No longer a fan of the stock
Since early last year both here on SA as well as among my industry colleagues, I've counted myself a fan of MGM and have set target prices for the stock first at $35, then down to $30 as it announced various initiatives to enhance shareholder value. First with the Profit Growth Plan (of which the parking fee is clearly a child), and afterward the proposed REIT IPO. I believed the cost cutting plan was fine but not a real strategy for a company that needed a far more ambitious vision of where it was headed. My reaction to the more recently announced company controlled REIT, was that it was a better configuration than a standard REIT, but that in summary, I did not see it as a solution.
To me, the company still has the best asset base of any Las Vegas dominant gaming operator and at least until the end of this year, the lowest exposure to the Macau downdraft. Its management is competent, not imaginative. It is facing the prospect of a 6,000-room addition to the Vegas strip to be built on the Echelon site by Genting, who, until recently, has merely been shoveling dirt around. Questions were raised as to whether the property would ever be built. But recent moves indicate Genting is after all serious, and the mega-casino will rise sometime between 2017 and 2018. So add that room inventory to your forecast, and on top of that, muse if Genting will offer free parking.
Las Vegas has recovered decently from the 2008-2009 recession, showing a respectable rise in visitation expected to reach 41 million this year. This augurs well for MGM because of its total room capacity. And the REIT IPO will presumably go a far piece toward reducing the company's burdensome leverage. The opening sometime in Q4 of the MGM National Harbor property in metro Maryland/DC will be a great success. However, a good part of its incremental contribution to EBITDA could be diluted by a less than stellar performance from its other new property, the $845 million MGM Springfield, which already has been scaled down during construction -- to the consternation of local officials.
That property faces some competition from the newly opened Plainridge Park slot parlor by Penn National Gaming, but more crucially, from the Wynn Everett project in metro Boston scheduled to open in 2018. On top of that, the two Connecticut tribal operators have decided to play offense. They're planning to jointly open a casino at the Massachusetts border to protect their Hartford-New Haven markets. MGM Springfield faces headwinds and it's not even open yet.
On top of this, the MGM Macau project due to open at the end of this year is another fingers crossed project that should do well -- depending on how much that market recovers from its current downdraft. We believe Macau recovery is already on the way. So while there is much good prospect in MGM to support bullish outlooks on the stock, I believe a pattern of puzzling management decisions that have flowed since my original $35 target has dampened my enthusiasm. With this latest curious decision at this time and place about parking, I've become even more skeptical.
On that basis, I see some downside left from the current price at writing $19.58 and an upside, assuming all goes well, in the $26 range.
In that case, my sense is MGM's a HOLD. And keep your eye on April/May gaming revenue numbers for MGM properties to get a clue on how the dice roll on parking is being absorbed. If parking turns out to be the nail in the horseshoe, it's clearly a sell.
About the author: Howard Jay Klein was a 25+ year c-level executive at major public casino companies and now consults in the industry. His views are those of an industry insider not a CFA. His objective is to give SA readers a 360-degree view of gaming companies and the prospects for their shares and strategies.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.