Making the News

NJBIZ

Originally Published:Monday, September 8, 2008

The problem now is that casinos currently have a cost structure that is relatively fixed, notes Bill LaPenta, director of financial analysis at Spectrum Gaming, a Linwood-based gaming research and professional services firm.

"Labor in particular makes up a significant part of their costs. They've tried to rein in the costs, but their ability to do so is generally not equal to the fluctuations in revenue that occur periodically. Right now they're being squeezed."

The casino-hotels are trying to wean themselves from gaming as a mainstay, says LaPenta.

"It could be argued that they should have done this years ago," he says. "But now at least we're seeing Harrah's and Borgata try to offer more diversified products to leisure customers."

Atlantic City's New Bet
Gaming resort considers new approaches as revenues continue to decline

By Martin C. Daks
NJBIZ

ATLANTIC CITY - With the summer over, some casinos in Atlantic City last week were licking their wounds, trying to recover from declining revenues and evaporating profits.

Financial worries in Atlantic City's casino industry could reshape the city, with gambling playing a smaller role, but any changes may also carry risks, some experts say. The casinos need to manage fixed costs better and reconsider their approach to gaming if they want to turn a profit, observers advise.

"The next five years or so will be very important for Atlantic City," says Richard C. Perniciaro, director of the Center for Regional and Business Research at Atlantic Cape Community College in Mays Landing. Casino-hotels "will likely either make the transition to upscale properties that do not primarily depend on gaming, or they will focus on middle-market gambling and possibly downsize to squeeze by with a less expensive product offering. But either way, they need to change their focus."

As a group, the 11 casinos posted a net loss of $39.4 million on $1.15 billion of revenue in the second quarter, compared to a $34.8 million profit on $1.19 billion of revenue in the year-ago period, according to the most recent data provided by the Casino Control Commission. Even though five of the 11 casinos managed to eke out profits in the second quarter, three of them saw net income fall from the year-ago period.

Casino-hotels represent a large capital investment and carry a high level of fixed costs, according to Perniciaro, referring to expenses that cannot be easily cut when revenue declines. He adds that casino-hotels' ability to turn a profit in the future is likely to depend on whether or not they are able to manage those costs.

"Under their current configuration, there isn't much room to wring much more in the way of cuts," says Perniciaro. "You need a minimum number of people to change linens and to serve food and drink. People expect a certain experience at a hotel-casino and you can't skimp on that."

The Tropicana Casino and Resort found that out the hard way in December when the Casino Control Commission declined to renew its operating license following rounds of layoffs and problems with cleanliness and service that allegedly resulted from cost-cutting efforts. The Commission then appointed a retired state Supreme Court judge to oversee the casino-hotel's operations until it can be sold.

"Smaller, more energy-efficient casinos could incur lower costs," says Corey Morowitz, CEO of Galloway-based Morowitz Gaming Advisors LLC. "The casinos need to redesign their processes and services in a more flexible fashion, so they can add or eliminate operations as needed without compromising quality."

The problem now is that casinos currently have a cost structure that is relatively fixed, notes Bill LaPenta, director of financial analysis at Spectrum Gaming, a Linwood-based gaming research and professional services firm.

"Labor in particular makes up a significant part of their costs. They've tried to rein in the costs, but their ability to do so is generally not equal to the fluctuations in revenue that occur periodically. Right now they're being squeezed."

The casino-hotels are trying to wean themselves from gaming as a mainstay, says LaPenta.

"It could be argued that they should have done this years ago," he says. "But now at least we're seeing Harrah's and Borgata try to offer more diversified products to leisure customers."

Facilities like Waterfront Tower at Harrah's Resort and The Water Club by Borgata have recently been offering high-priced rooms with amenities like personal saunas, luxury shopping and other entertainment, but no gambling.

"Their hope is to attract people who want luxury and are willing to pay for it," says Perniciaro, contrasting big spenders with day-trippers. "The big question is the number of [wealthy] people they'll be able to attract. Gaming differentiates Atlantic City from luxury hotels in, say, New York. If you remove gaming as a main attraction, can you still get the critical mass of people you need?"

Perniciaro says Atlantic City may choose another path-shrinking the number and possibly the size of casinos in a bid to focus on day-trippers and other less-wealthy clients.

He notes that plans by MGM Mirage and Pinnacle Entertainment Inc. to develop Atlantic City properties have been put on hold.

"Currently, almost all the casinos own multiple properties in Atlantic City," adds Perniciaro.

Earlier this year, Coastal Marina LLC, a New York City-based company, agreed to pay $316 million for the Trump Marina Hotel Casino, which lost $22.3 million on $53.7 million of revenue during the second quarter, compared with a $1.6 million loss on $57.4 million of revenue in the year-ago period. The deal is expected to close by early next year.

"I don't expect Atlantic City to disappear," says Perniciaro. "But it may be that the current configuration of 11 casinos is not a good fit for the city. We may end up with a smaller footprint or one that is otherwise different than what we currently have."

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