Making the News

Press of Atlantic City

Originally Published:Sunday, April 25, 2010
http://www.pressofatlanticcity.com/opinion/commentary/article_810aee88-665f-5d08-98dd-b72fb9a5e293.html

200-room casino hotels? / Michael Pollock / Assessing Whelan's plan means asking the right questions

By Michael Pollock
Press of Atlantic City

When the Claridge Hotel & Casino was still an independent operator battling against much larger, better financed (and often newer) opponents, it rolled out the slogan "Smaller is Friendlier" as a way to differentiate itself in the bruising Atlantic City marketplace.

The slogan failed to mention that smaller can also be more expensive and less efficient. And when your property is older, and a block off the Boardwalk, all the smiles in the world are not enough to succeed.

Atlantic City, despite its challenges in recent years (and, to some degree, because of those challenges), is still a bruising marketplace where competitors will do what they can to gain or protect market share. The fixed costs associated with operating a casino hotel remain daunting, and those fixed costs inure to the benefit of larger properties. When you are able to spread those costs among a larger base of hotel rooms, gaming positions and overall assets, your margins improve. That benefits larger properties, but also larger companies that are able to consolidate some costs for multiple casinos.

Additionally, the history of gaming in Atlantic City shows that larger properties can target niche markets as well, and can successfully mine multiple niches. Moreover, workers at Borgata were able to conjure up a smile just as easily as their former Claridge counterparts. And, because their jobs were more secure, the smiles may have come a bit more naturally.

State Sen. Jim Whelan's proposal to allow a few smaller properties to enter the Atlantic City marketplace is a measured response designed to conjure up interest and attract fresh capital investment to the market. But we point out that any such proposal offers no guarantee of success. If his bill becomes law, it does not provide a license to mint greenbacks. Any existing or potential operator seeking to target a potential niche must identify the risks as well. Every location, every design and every business plan requires its own detailed assessment. Can it overcome the challenges, including limited economies of scale? Will its larger, pre-existing competitors welcome it by sending over a Bundt cake, or a kick in the corporate teeth?

Because we are in the business of providing such analysis, we have to remain neutral on Whelan's proposal, but we suggest a framework in which it should be assessed: Will it attract fresh capital? Will it attract operators who would otherwise not be interested in Atlantic City? Will it help generate additional investment in nongaming attractions? Will existing operators pull back on investments that they might otherwise have made, or perhaps invest even more since they have a new competitor in town?

Any assessment of Whelan's proposal must include a complete understanding of his vision. In his words, he is not contemplating a Motel 6. Quality and size are not mutually exclusive concepts. The St. Regis in New York has 164 guest rooms and 65 suites. The Holiday Inn, a few blocks away, offers 600 rooms. All else being equal, most discerning travelers would select the St. Regis as the higher quality product.

Whelan's proposal has also generated a public statement from Hard Rock International that it is "intrigued by the newly proposed legislation." That alone shows that the senator may be on to something here.

The concept must leap over some high hurdles on its way to passage, but all these challenges boil down to a single question that must be answered: Will this idea be a net benefit to Atlantic City at a time when the city is in desperate need of good news?

Michael Pollock is managing director of Spectrum Gaming Group in Linwood.

 

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