I write about gambling because it ranks 6th behind drinking, drugs, sex, restaurants, and movies as a global entertainment industry. But I am hardly an expert on the subject. So having just visited Las Vegas and written a couple of pieces on coming casino problems in the northeast US, I decided to interview two people who are paid to know more than anyone about global gambling.
Bill Lerner is a principal in the Union Gaming Group, a portfolio of companies focused exclusively on the global gaming industry. The firms, with offices in Las Vegas and Macau, specialize in global equity research, investment banking, and gaming-related market and economic analytics. Their clients include public and private casino and integrated resort operators, gaming equipment manufacturers and real estate entities. They also work with various financial partners. Bill comes to this job after 16 years on Wall Street, most recently as Managing Director and Senior Gaming & Lodging analyst at Deutsche Bank Securities.
Warwick Bartlett is the Chief Executive of the Global Betting and Gaming Consultancy (GBGC). GBGC claims to be the largest and most credible specialist international gambling consultancy in the world. The company has worked with or supplied information to over 500 clients. Projects have included market research/assessments, business/facility planning, product evaluations, design/operational reviews, the development/review of corporate strategies, license applications, regulation development for and on behalf of governments, IPOs, M&A and due diligence. Typical clients include: operators, monopolies/lotteries, suppliers, investment banks, the major consultancies, and governments. I can attest to the quality of GBGC's data base, having used it in past articles.
In what follows, I (ERM) will ask Bill (BL) and Warwick (WB) a set of questions about the economics of global gambling.
ERM: Viewing gambling as an addiction, you would think that, like cigarettes, it would be recession proof. But I have found that not to be the case, at least insofar as casino gambling is concerned. Instead, casino demand appears to behave more like highly discretionary consumer purchases, meaning they fall sharply in recessions. What do you see?
BL: I agree. Gambling expenditures behave like other discretionary outlays. And the wealth effects of the tremendous asset losses suffered in the global recession had plenty to do with gambling expenditure cutbacks.
WB: Our data (Table 1) suggest the Las Vegas Strip will not hit its previous 2007 peak in gross gaming revenue (GGY) of US$6.8 billion until 2014. Look at growth rates of GGY against US gross domestic product (GDP). Looking at all the gambling industries, casinos suffer more than almost any other industry during a recession. The recovery started toward the end of 2009. Despite a 9% uplift from 2009 to 2011, Vegas has a long way to go. And the prospects of some Federal budget balancing after the Presidential election could slow down the gambling recovery. The casino business in Europe has been awful. For those who say gambling is recession proof, look at Spain and Greece where revenues have plummeted.
Table 1. - Las Vegas Gaming Revenues and US GDP Growth
GGY (in bil.)
GGY % Growth
GDP % Growth
Source: Global Betting and Gaming Consultants, Nevada Gaming Control Board, and US Bureau of Economic Analysis
BL: Nevada has been bolstered more recently by baccarat revenues coming from Asian customers. Without this uptick, things would be worse.
ERM: For my last two gambling articles, I pulled together gambling revenues for both Nevada and Connecticut. Connecticut looks even worse than Nevada.
BL: CT has been impacted by additional supply in its feeder markets: Resorts World NY, Revel AC, Sands Bethworks (adding table games), and eTables at Empire City in Yonkers.
ERM: I note that in the US, slots are king. Slots demographics worry me. Slots mostly attract older players who like to smoke, drink, and gamble in public. I quote Michael Meczka, a casino marketing consultant: "There aren't any new customers out there. Gaming is an aged community….Anyone who has ever wanted to try a casino has tried a casino." Younger people in contrast don't like to smoke as much and do a much larger percentage of their gambling on the Internet. On the other hand, the baby boomers are getting older which should increase the number of slot players. How do you see this working out?
WB: I don't buy it. There are so many vested interests that are anti-gambling in the US that, figuratively speaking, the results are in before the questions are asked! I can tell you that in the UK, the Government fear is that too many young people are gambling on slots. And remember that at least for now, Internet gambling in the US is supposed to be illegal. This restriction limits the amount of Internet gambling. Because real money wagering online is illegal, the take up of play for free on Zynga has been phenomenal and a large percentage of those players are the younger generation.
I have a great deal of faith in people. I trust that the State has educated them sufficiently that they can look after themselves and make their own decisions. People do not want politicians telling them how they should spend their taxed dollars. They are capable of making that decision for themselves. I am a baby boomer myself and have been gambling all my life. It does not necessarily follow that boomers will be slot players. They will make a judgment as to what is the best available offer that suits their personal criteria of entertainment, value and convenience.
BL: Electronic gaming technology has improved and changed in a fashion that leaves us comfortable with the still secular nature of slots. Content is increasingly relevant for demographic change; electronic table games capture new players and slot players otherwise intimidated by live table play.
ERM: I am somewhat surprised to hear that MA and NY are getting bidders for proposed new casinos. And yes, they will be able to get some of the CT market, but I wonder if there is a real market for new additional casinos in this area. Foxwoods and Mohegan Sun are in real trouble. Do you think this is a case where supply will create demand, or do you think this will mostly be the CT casinos giving up market share to MA and NY casinos?
WB: By European standards, the US is underserved with legalized gambling facilities. This is the reason for so much illegal gambling. In Europe, we think it is bizarre that gamblers in the US think nothing of traveling 100 miles to go to a casino. In the US, the casino offerings are huge: massive resorts that truly excite the customer. But most require considerable travel and in recessions people tend to stay at home. But supply will create demand because US casinos are more than just gambling. My understanding of Foxwoods is that they grew too fast and took on too much debt and that has been a burden to them. Other tribe casinos have done better because they have expanded with caution. New casinos bring forth new visitors as much out of curiosity as anything else. They key is maintaining those levels of early interest. And for the older casinos to keep up to date requires continuing large capital outlays.
BL: Right now, we cannot say anything about MA.
ERM: Visiting Las Vegas for the first time, I was struck by how casino complexes have become shopping malls. And I note that the head of Foxwoods said they can't make any more money off gambling so they are making space for 75 shopping outlets. Do you see this shopping mall and other non-gambling activities now as all-pervasive in the US industry? And a related question: nobody appears to be buying anything in the Vegas mall shops. I know it is a slow time of the year. But is my observation correct? And if so, will the shop complexes that took out leases renew?
WB: It is all about creating a rounded leisure experience, the operators provide gambling, spas, theater, sport venues, great restaurants, exhibition facilities, so why not shopping? The guys go off and do their thing and the girls go shopping. It is all about providing something for everyone. I know people who go to Vegas and never gamble!
Regarding the empty shops: The US is slowly coming out of recession. People are de-leveraging. Credit card debt has fallen 25% from the 2007 peak. It will take time, but I am confident about the future of the US. The key going forward is who your next President is. My take from London is that if Obama is re-elected, he can hit the ground running, tackle the deficit in a meaningful way since he does not have to worry about a second term. If Romney wins, he may lose the initiative in the first year, and thereafter he is on the way to the next election. I do believe that some of the shops will not renew their leases, but I would not be too concerned about that. Property companies will just have to price those shops back into the market. We are seeing this happen in the UK. Landlords have gone from being non-negotiable on everything to make me an offer and taking it. Existing stores with leases are telling landlords that rents agreed to in 2007 are not sustainable. So take 25% less or we walk. And they are taking 25% less!
Interesting to note that according to Steve Wynn, his Ferrari showroom in his Vegas casino resort sells more products than any other dealership in the world.
BL: Casinos have certainly expanded with non-gaming amenities in many markets around the US. We suspect this trend will continue. It is a great way for casino operators to monetize land and to capture a customer for a longer duration stay (dining and shopping). Performance varies by property and by market though.
ERM: Looking at the global gambling market, it appears Macau is doing well. How about the rest of the world? Is it more like the US or Macau? Are shopping malls spreading in Macau like in the US?
WB: Macau has done exceptionally well and, with 1.4 billion Chinese on the border, it is likely to continue to do well. Up to August GGR is up 15%. However, there is now more supply coming on stream with the new Galaxy casino and Las Vegas Sands (LVS) additions in Coati section of Macau. We are betting on a Chinese economy that will sustain a hard economic landing so Macau may see fewer high rollers in 2013. Last year 73% of revenue was VIP baccarat so any softening in that segment of the market will hurt. If the recession does play out in China we have to remember that Macau is dependent on how Beijing feels about its citizens going to Macau to gamble during hard times. If Beijing restricts visas, Macau casinos will be hurt.
ERM: Those baccarat numbers are amazing. In Nevada, baccarat constitutes only 12% of gambling revenues versus 63% for slots/VLTs.
ERM: It appears to me this should be a good period for the companies that make slots and VLTs. Even if the gambling market in the US is flat, different states are buying these machines to gain market share and tax revenues. Do you agree?
WB: Yes I do. In the US, most slots are sold on a revenue share basis, so if the economy suffers revenues will fall. However, once the slot/VLT has been installed, the running costs are quite low relative to revenue so I do like IGT (IGT), WMS (WMS) and Lottomatica (LTTOY.PK). But never forget that when times are tough, governments use the gambling industry like an ATM. So what looks good today could look a lot worse if taxes are increased.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.