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Recession lessons may help Las Vegas casinos face next downturn

When the Great Recession hit Las Vegas, its economy didn’t just drop. It nosedived.

Tourism, the city’s lifeblood, took a huge dip. Visitor volume dropped by more than 2.8 million people between 2007 and 2009, according to the Las Vegas Convention and Visitors Authority. The city’s economy dropped to fifth among 150 metropolitan areas in a 2010 ranking from the Brookings Institution. That same year, Nevada’s seasonally adjusted unemployment rate rose to a staggering 13.7 percent, according to the Bureau of Labor Statistics.

After years of rapid growth, it appears that another recession is on its way. In August, the yield curve inverted — meaning the benchmark 10-year Treasury note slipped briefly below 2-year Treasury yields. Such an event has preceded at least the past five U.S. recessions and is a sign of economic pessimism.

While the last economic downturn had a dramatic impact on local casinos, most experts expect the industry will be better able to weather the storm during the next recession.

Lessons learned

Casinos were hit hard during the last recession, according to Michael Green, an associate professor of history at UNLV.

“The problem for the casinos was the lack of discretionary income,” he said. “Fewer people came here to gamble or play, and the people who were coming here were often spending less.”

Progress on the Fontainebleau and Boyd Gaming’s Echelon — now Steve Witkoff’s Drew Las Vegas and Genting Group’s Resorts World Las Vegas, respectively — ground to a halt. The Cosmopolitan of Las Vegas, originally valued at $3.9 billion, was sold to The Blackstone Group for $1.7 billion in 2014, only four years after it opened.

Las Vegas’ economy was slow to recover but has since gained its footing. But Green wonders whether the casino industry took away any lessons from the last downturn.

“There was talk at the time to rethink our economy and culture, and we didn’t,” he said. “It isn’t as though the outcome of the recession was the creation of a lot of better-paying jobs requiring better education.”

But Jeremy Aguero, principal analyst at Applied Analysis, said that after the last recession, casino operators grew more diversified, more efficient and more risk-averse. They focused on bringing in a diversified audience and broadened sources of revenue outside gaming.

In 2007, 47.9 percent of Clark County casinos’ revenue came from gaming. By 2017, the figure was down to 40.9 percent as resorts relied more on things such as room rates and food and beverage sales.

The recession was “so deep and so difficult, it changed the way people operate altogether,” Aguero said. “Our hotels and casinos are much more diversified within their own four walls than they were.”

Derek Stevens, co-owner of the D Las Vegas, said most casino operators today have a better balance sheet today when compared with 2007.

Many casinos have streamlined their business since the last recession. MGM Resort International, for example, cut 1,070 jobs as part of its MGM 2020 initiative.

But lowering costs too much in the midst of a booming economy could hurt employees down the road, according to Todd Simons, a longtime casino executive who is a managing partner in the consulting firm Hidden Fruit.

When there’s a strong economy, operators are always looking for ways to improve the guest experience, lower costs and grow revenue.

But for many casino companies, Simons said, “there’s no more fat to cut” when the recession hits.That could mean they turn toward other ways to reduce costs, possibly turning toward automation.

“When revenues begin to stagnate and in some cases retract, we look to find additional revenue streams or efficiency within the operation,” Simons said. “When you get to a point where all of the efficiencies have been realized with the current operational structure, we then look at consolidation of roles and responsibilities and automation.”

Representatives from the six largest gaming employers in Las Vegas — MGM, Caesars Entertainment Corp., Red Rock Resorts, Boyd Gaming Corp., Wynn Resorts Ltd. and Sands Las Vegas Corp. — declined to comment.

Are casinos prepared?

The question isn’t whether Las Vegas will get hit by another recession, according to economist John Restrepo. It’s how hard it will hit.

“How prepared are resorts? That depends on the depth” of the recession, he said.

Many economists expect a recession to hit within the next couple of years, but Restrepo said it’s unlikely that slump will be as severe as the Great Recession.

He said Las Vegas operators should be able to handle the next recession “pretty well.” He doesn’t expect massive layoffs based on current economic trends, and he said casinos could keep visitors interested by dropping prices.

Simons was executive vice president of casino operations and marketing for Planet Hollywood Resort when the Great Recession hit. He said incentives such as discounted hotel rates or entertainment would be an easy way to attract visitors.

“It gets people interested and says, ‘Look, we know we’re in a recession, but you still have money to spend,’ ” he said.

If it is a deep recession, Restrepo said, then all bets are off.

“If the trade war gets worse, if there are international events that become bad or get worse, then that’s a different discussion,” he said. “Hopefully this time we learned a lesson and we’re paying attention to the indicators.”

Reactionary approach

While economists agree that a recession is bound to hit eventually, finding a way to prepare as a casino operator isn’t a one-size-fits-all task.

“You can’t paint every property with a single brush,” Aguero said.

In general, he said, casinos can start preparing by making sure they’re “operating in the best way possible,” holding sufficient revenues and keeping a pulse on their customer base.

But according to Simons, it’s hard to prepare for a downturn.

“It’s more of a reactive-type of approach than it is anything proactive,” he said. “The business doesn’t just fall off the edge when a recession hits. It’s a gradual decline.”

Others say the downturn could spur opportunities for local operators. For example, Aguero said some travelers could opt for Las Vegas instead of more expensive destinations like Hawaii. And Stevens, developer of the downtown hotel-casino Circa, said he prefers investing during downturns.

“I feel pretty good about the fact that we’re investing in Circa right now,” he said. “You’ve just got to make sure you’ve got a large amount of equity in any project. … You don’t want to take on too much debt when there’s the potential of a downturn.”

The Review-Journal is owned by the family of Las Vegas Sands Corp. Chairman and CEO Sheldon Adelson.

Contact Bailey Schulz at bschulz@reviewjournal.com or 702-383-0233. Follow @bailey_schulz on Twitter.

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