any casino executives don't expect to break ground on another major building project in Las Vegas for at least 10 years. "The old model has been thrown out the window," says MGM Mirage CEO Jim Murren. For most of this decade, casinos embarked on a debt-fueled expansion, plowing more than us$ 30 billion into casino and hotel projects around Las Vegas. When the economy collapsed, it left casino companies with dwindling revenues and mountains of debt. Several entered bankruptcy-court proceedings.
Now, casino companies are eschewing capital-intensive projects to focus on increasing profit margins through branding, marketing and customer loyalty.
MGM Mirage spent the past few years planning an us$ 8.5 billion hotel and casino complex called City Center, slated to open later this year. But in the future, it will adopt a more conservative strategy of trying to lure more customers to its existing properties, "and it doesn't take a us$ 3 billion building to do it," Murren says.
The new approach represents a challenge for an industry that has relied on glitzy casino and hotel openings as one of its primary draws. "It's the theme-park dilemma," says Robert LaFleur, an analyst for Susquehanna Financial Group. "You've got to build a new roller coaster. Everyone likes to go but you need a reason to keep them going back."
In the past, Las Vegas was considered fairly recession-proof as gamblers returned to the city despite economic downturns. But the industry's reliance on nongambling revenue from hotels and restaurants and other entertainment means it is more dependent on business and leisure tourism than in the past.
People kept coming back to Las Vegas earlier in the decade - and spending more and more money when they did. In July 2007, visitation to the city was up 13 % compared with the same month in 2002, while gambling revenue was up 53 % and room rates were up 74 %.
The massive investments in construction projects also boosted casino stocks as investors bet that revenue and profits would rise. Las Vegas Sands Corp. shares hit us$ 144.56 in the fall of 2007, more than double their closing price on the stock's first day of trading at the end of 2004. MGM Mirage's stock nearly tripled to us$ 99.75 a share during that same period.
Many companies tried to pile into the Las Vegas market. In May 2007, El-Ad Group of Israel paid nearly us$ 36 million an acre for 34.5 acres of land on the Las Vegas Strip, with plans to build a us$ 5 billion complex.
That all collapsed when the economy went sour. By this spring, MGM Mirage stock had lost 98 % of its value and Las Vegas Sands stock had fallen 99 % from its peak. Both have recovered somewhat since then. MGM Mirage is trying to work off its more than us$ 12 billion in debt, while Las Vegas Sands is trying to reduce its more than us$ 10 billion in debt. The plans for El-Ad's complex on the Strip never materialized.
Gambling revenue in Las Vegas this year was off 13% through July compared with the same period a year earlier, while visitation was down 6% and room rates were off 26%.
"The industry is seeking a new equilibrium," says Gary Loveman, the chief executive of closely held Harrah's Entertainment Inc. "The last period was one where people were drunk on the use of capital and used it to solve every problem. Clearly that can't continue."
In the place of new buildings, the casinos and the Las Vegas Convention and Visitors Authority say they are working to create more special events. Examples include the Nascar awards to be held in December in Las Vegas after decades in New York, and a small-theater Beyoncé concert specially designed for the Wynn Las Vegas earlier this year.
MGM Mirage this year announced plans to franchise some of its landmark casino brands, such as the Bellagio, MGM Grand and Skyloft hotels, through a new hotel-management division. The strategy is intended to minimize MGM Mirage's risk and investment by relying mostly on hotel owners to find the capital for new projects.
The investments the industry is still making are happening far from the Strip. Many casino companies are considering modest investments in some of the states that are looking to expand gambling to try to increase revenue. Harrah's, for example, recently announced an agreement to purchase a bankrupt race track in Ohio for $89.5 million after the governor and the legislature authorized slots there. That could be challenged by a popular vote next year.
Some Las Vegas-based casino companies now see Asia as their primary vehicle for growth. Last week, Wynn Resorts Ltd. priced shares in the initial public offering of its Macau operations at us$ 1.30 each, valuing the total number of shares in the unit at us$ 1.63 billion. Wynn operates Wynn Macau, a 600-room replica of its Wynn Las Vegas casino. It plans to open the us$ 650 million Encore addition in the spring.
Las Vegas Sands has a us$ 12 billion plan to recreate the Strip on an island off Macau, but the project has stalled while the company addresses its hefty debt. Sheldon Adelson, CEO of Las Vegas Sands, says he doesn't plan on investing further in Las Vegas for the moment. "I'm already fulfilled in Las Vegas," Adelson says. "I don't see the need for any more."