Making the News

Philadelphia Inquirer

Originally Published:Sunday, February 15, 2009
http://www.philly.com/philly/news/homepage/39628322.html?viewall=y

Competition and economy take toll in A.C.

By Suzette Parmley
Philadelphia Inquirer

ATLANTIC CITY - This place has been playing the odds for more than 30 years, so here are some to consider:

The odds were Atlantic City would continue to be home to an uncertain number of casino hotels and a destination for Easterners looking for a Las Vegas-type experience.

But the odds are that Atlantic City will fade, that it will be less than it wants to be, less than it needs to be.

Thirteen months ago, the city was headed for 15 casino hotels, five of them newer, upscale palaces already in operation and four of them new mega-casinos under development - the kinds of resorts that attract the most preferred customers.

Today, that vision is shattered. Six of the 11 existing casino hotels are in bankruptcy or threatened with it. The four glitzy projects that were planned are now, at best, on hold.

Blame it on the economy and competition. The economy might improve, but there is no forecast that it will happen any time soon. The choking grip of competition, primarily from slots-smitten Pennsylvania, will only grow stronger.

The result is certain to be a diminished Atlantic City. The revenue falloff that comes from that will surely affect those whose livelihoods depend directly on the casinos, and those who depend indirectly for things like refilling their drug prescriptions.

"Atlantic City's days as the East Coast's premier gaming market are over," said Andrew Zarnett, gaming analyst at Deutsche Bank A.G. in New York. "Its time has come and gone."

If Zarnett is right, the consequences will be harsh. The town, the region, and the state of New Jersey depend on the casino industry for money and jobs.

The casinos made up 80 percent of Atlantic City's property-tax revenue in 2007. Last year, that number dipped to 75 percent after the loss of the Sands casino in late 2007.

The 11 casinos now operating employ about 38,000, down from a high of 51,560 in July 1997, and generate about $1 billion in annual wages. Two straight years of declining gambling revenues have led to the loss of thousands of jobs - more than 4,000 layoffs in just the last six months.

This adds to New Jersey's misery: In December, its jobless rate spiked to 7.1 percent, its highest point in nearly 15 years. In all, 15,200 jobs were lost, according to state Department of Labor and Workforce Development statistics.

In the fiscal year that ended June 30, the casinos and their major subcontractors spent more than $4.2 billion to purchase goods and services from 6,312 companies. The companies provided everything from flowers and limos to legal services and food supplies.

Gambling proceeds are taxed 8 percent in New Jersey, most of which goes into the Casino Revenue Fund, which pays for programs aiding seniors and the disabled. Among them is the Pharmaceutical Assistance to the Aged and Disabled program, known as PAAD.

The casinos are required to reinvest an additional 1.25 percent of their gross revenue in projects approved by the Casino Reinvestment Development Authority. These projects have included the Walk outlet mall in downtown Atlantic City, and community centers and public housing statewide.

The authority collected $56.8 million last year, its lowest amount since 2003 and down from its peak of $65.3 million in 2006 - the year the first slots parlor opened in Pennsylvania.

"The economic reach of Atlantic City's casinos is incredibly wide, and the damage caused by the gaming downturn in New Jersey affects folks in all corners of the state," said Democratic State Sen. James Whelan, a former Atlantic City mayor.

The fractured economy is absolutely to blame for development halting on the four opulent casinos that were designed to give Atlantic City the portfolio that attracts big-spenders.

The $2.5 billion Revel casino next to Showboat on the Boardwalk was one of them. It and the others - Pinnacle Entertainment's $1.5 billion casino, MGM Mirage's $5 billion gambling palace, and a $1 billion casino financed by an Atlantic City investor group - were patterned after the successful Borgata, which is an overnight destination. Its rooms are the costliest among the casinos here at $150 a night during off-peak season.

The five-year-old Borgata, modeled after a Las Vegas casino resort, has continued its dominance of the Atlantic City market. Last month, it took in $58.2 million, the most among the casinos here - but a decrease of 4.5 percent from a year earlier, underscoring the impact of the economy and competition.

"One hundred percent, it's the environment," said William Baily, 27, of Long Island, N.Y., while playing the slots at the Borgata this month. "Nowadays when the younger crowd comes, they like to go to the nightclubs. They want to see other young people."

Now the Revel and the other three projects are question marks.

"Atlantic City was knocking at the door of becoming a destination resort until this confluence of recent events set those efforts backwards," said Joe Weinert of Spectrum Gaming Group L.L.C., a global gambling consulting firm in Linwood, N.J. "There is a real downer mood in Atlantic City right now."

Competition is a major ingredient in that confluence of events. Four new or expanded casinos will open in Pennsylvania this year and add to the seven slots parlors throughout the state that already have cut deeply into Atlantic City's revenue.

The $743 million Sands Bethlehem Casino, an hour's drive from Philadelphia, is set to open Memorial Day weekend with 3,000 slot machines.

Weinert said the new casino would be a formidable competitor to Atlantic City by attracting customers from North Jersey and New York, where Atlantic City draws about 45 percent of its business.

Sands "is going to funnel customers from Atlantic City's No. 1 feeder market right onto Interstate 78 and into its parking garage," he said.

PhiladelphiaPark Casino & Racetrack in Bensalem is to move into a bigger facility in December with nearly 40 percent more slots. PhillyPark attracts many Atlantic City customers from the Philadelphia suburbs and Northeast Philly, and has been the most profitable casino among the Pennsylvania gambling parlors.

"With all these casinos going up in Philly and wherever else, competition is stiff," said Hilary Lipscomb, 60, of Berlin, Camden County, as he sat playing slots inside a half-empty Resorts Atlantic City casino on a recent weekend, "so the profits they made here in the past are foregone.

"Unless they start giving away more comps [freebies], which they can't because people are losing their jobs, I don't think it's going to get better," Lipscomb said.

Some envision an Atlantic City with five glitzy, highly popular casinos, and two, three or four subpar gambling houses that attract a less appealing clientele. It is a vision of a town riven by its past and present, and moving toward an uncertain future.

"Atlantic City could become a tale of two casino markets - those that have and can continue to reinvest in their product, and those that cannot," said analyst Weinert. "This tends to lead to the self-feeding phenomenon in which the rich get richer and the poor get poorer."

When the tiny Sands Hotel Casino - hobbled by its inability to compete against the bigger, splashier casinos here - was imploded in October 2007, the landscape was altered.

Some believe it will get altered again this year, as one or two casinos are predicted to close.

"What you'll see is survival of the biggest, not necessarily survival of the fittest," Zarnett said. "The larger properties have greater economies of scale and are able to stay in positive-cash-flow territory. It's those casinos that generate negative cash flow that will be the first to close."

That's something that Tom Carver, executive director of the Casino Reinvestment Development Authority, doesn't want to see, not in this economy.

"If anyone shuts down, it has an immediate effect on state revenues," he said. "It means that millions of dollars in revenue that fund senior programs are effectively impacted. It means having to postpone [redevelopment] projects for the long term."

The Borgata and the four Harrah's Entertainment Inc. properties - Bally's, Caesars, Showboat, and Harrah's Resort - have weathered the recession better than their counterparts. The five had invested heavily in a mix of restaurants, pools, shops, concert halls, and nightclubs to attract revenue beyond gaming.

Revenue from food and beverage and rooms at some of the fancier casinos, such as the Borgata and Harrah's Resort, were up in the third quarter of 2008 compared with the third quarter of 2007, indicating the formula was working to some extent despite the economy and new competition.

Besides the Borgata's single-digit decline, Harrah's Resort was down only 2.4 percent in revenue last month, and Caesars just 7.6 percent.

The prognoses are troubling, perhaps terminal, for the others: The three Trump casinos, Resorts, and the Atlantic City Hilton are scrambling desperately to restructure their debt. Lenders have threatened to foreclose on Resorts, which posted the largest revenue decline last month - 25.4 percent - and hasn't paid its mortgage since October. The Tropicana Casino & Resort is about to be sold at a bankruptcy court auction.

As he headed to his $90-a-night room at the Tropicana, John Dodson said he hoped Atlantic City would survive the storm. He started coming here as a youth and has fond memories of the rides at Steel Pier and Million Dollar Pier.

"I don't want to see it go down the tubes," said the 69-year old retiree from Abingdon, Md.

But Dodson knows the odds aren't favorable. His home state legalized slot-machine gambling last year and now poses another threat to Atlantic City's business.

"They're putting slots in Maryland," he said, "and I know that's going to have an effect."

 


Four Mega-Casinos Are Halted in Atlantic City ... ... While Pa. Moves to Open or Expand Four Casinos

Last February: Pinnacle Entertainment Inc. of Las Vegas announced it was indefinitely postponing its planned $1.5 billion Boardwalk casino.

October: MGM Mirage Inc. of Las Vegas announced it was postponing its $5 billion MGM Grand Atlantic City Casino Resort in the city's Marina District.

November: The local investor group led by former Caesars Entertainment chief executive Wallace Barr and former New Jersey Casino Reinvestment Development Authority head Curtis Bashaw confirmed it was delaying its proposed $1 billion casino for the southern end of the Boardwalk.

Jan. 28: Revel Entertainment Group L.L.C. confirmed it was suspending all interior work on its $2.5 billion casino on the northern end of the Boardwalk next to Showboat. Only the exterior of the casino would be built until credit markets improve.

SOURCE: Individual casino operators

 

April 15: The Meadows Racetrack & Casino is scheduled to move into a bigger, $450 million facility with 2,665 slot machines in North Strabane Township, Washington County.

May 22: Sands Casino Resort Bethlehem plans to open a $743 million casino with 3,000 slots in Bethlehem.

Aug. 15: The $780 million Rivers Casino is scheduled to open with 3,000 slots in Pittsburgh.

Dec. 15: PhiladelphiaPark Casino & Racetrack plans to move into its expanded $250 million facility with 4,000 slots in Bensalem.

The four openings will add 7,940 slot machines - adding to the approximately 16,800 slot machines in the seven existing Pennsylvania slots parlors.

Note: The Meadows currently has 1,825 slots, and PhillyPark has 2,912 slots.

SOURCE: Pennsylvania Gaming Control Board


Contact staff writer Suzette Parmley at 215-854-2594 or [email protected].

 

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