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gaming and nevada s economic future: the challenges ahead

BASIC THESIS: THE GAMING INDUSTRIES IN NORTHERN AND SOUTHERN NEVADA HAVE CHANGED PERMANENTLY. Northern Nevada: External competition plus only limited capital investment => Rapidly diminishing tourist componentSince the Great Recession, the decline has been far more dramaticSouthern Nevada: Over-investment plus the Great Recession created a financially distressed set of gaming companies and a gaming tourism industry that will only sluggishly recoverGrowth was robust until November 2007, aft1139

JasminFlorian
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gaming and nevada s economic future: the challenges ahead

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    1. GAMING AND NEVADA’S ECONOMIC FUTURE: THE CHALLENGES AHEAD DIRECTIONS 2011 FEBRUARY 3, 2011

    3. NORTHERN NEVADA’S GAMING INDUSTRY Long term decline (since the 1990s) in gaming revenues, tourist visitation, industry supply Since 1990, growing competition from Las Vegas, and from Tribal gaming in California, the Pacific Northwest & Western Canada Only limited capital investment in Reno-Sparks and South Lake Tahoe casinos over past two decades Due largely to declining demand and lowered expectations on profitability Growing importance of local customers => When accounted for, the drop in tourism is even worse than the numbers suggest Tourism gaming spend in South Lake Tahoe is down nearly 2/3s since 1990 in real terms; for Reno, tourism spend in casinos is down nearly 2/3s since 2000 The percentage of gaming revenues from locals in the Reno market has climbed from about 10% in 1990 to 40% today

    5. FUNDAMENTAL DRIVERS FOR SOUTH LAKE TAHOE GAMING MARKET “…It must surely be the fairest picture the whole world affords.” Mark Twain, Roughing It Drive-up business from Northern California via Highway 50 Difficult drive in winter months Opening of Red Hawk Casino near Placerville in December 2008; has an off-ramp from Highway 50 Seasonal tourism linked to skiing, second home ownership No locals’ market of any significance Constraints on casino growth created by Tahoe Regional Planning Acts in 1980, 1967 Difficulty of access from regional airports Reno International is closest at about 90 minutes away

    9. CHANGES IN ECONOMIC PERFORMANCE SINCE THE BEGINNING OF THE GREAT RECESSION Also dramatically affected by the opening of Red Hawk Casino in Shingle Springs (December, 2008)

    12. PROGNOSIS: CASINO INDUSTRY AT SOUTH LAKE TAHOE Real Gaming Revenue performance since 1990: 1990 to 2000: 12.6% decline 2000 to 2007: additional 23.2% decline 2007 to 2010: additional 37.5% decline 2010 Gaming Revenues are at 37.9% of 1990 level Slots & Tables are at 39.8% of 1990 levels; Employment is at about 32% of 1990 levels Lake Tahoe gambling visitors were not attracted by the beauty or recreational opportunities of Lake Tahoe Good alternative choices for gaming took them away No significant locals’ market to sustain SLT casinos Alternative Strategy: Tourism Accommodation Units Has also seen dramatic declines since 2007 Byproduct of the end of the housing bubble Possibly heading to become a one casino market

    14. FUNDAMENTAL DRIVERS FOR THE RENO-SPARKS GAMING MARKET Historically, an important regional tourist market overshadowed by Las Vegas since the 1960s Downtown casino market has struggled since 1970s; emergence of satellite casinos outside the downtown Peppermill, Atlantis, MGM (Grand Sierra), etc. High degree of seasonality for tourism, driven by climate, special events in summer, fall Reno Rodeo, Hot August Nights, Reno Air Races, Street Vibrations, Bowling Stadium & related tournaments, etc. Adequate convention facilities; good air transportation, but still a heavily “drive-to” regional market Significant competition from Las Vegas, California Tribal gaming, especially since 2000 Growing importance of locals’ market as Reno has grown in past 20 years Reputation of being a “Budget Market” that has been hard to change over the years

    19. CHANGES IN ECONOMIC PERFORMANCE SINCE THE BEGINNING OF THE GREAT RECESSION Also dramatically affected by the collapse of the construction industry and its effect on locals’ gaming spend

    22. PROGNOSIS: CASINO INDUSTRY FOR RENO-SPARKS MARKET Real Gaming Revenue performance since 1990: 1990 to 2000: 4.0% increase 2000 to 2007: 25.0% decline 2007 to 2010: additional 30.0% decline 2010 Real Gaming Revenues at 56.0% of 1990 level 2010 Real Tourist Gaming Revenues at 36.5% of 1990 level Most of Reno-Sparks declines have occurred since 2000 (correlated to California Tribal gaming’s growth) Slots & Tables are at 68.4% of 1990 levels; Employment is at about 58% of 1990 levels The difference between Reno and Tahoe are in the locals’ gaming market => Tahoe has none; for Reno, now 40%(+/-) of its market Tourism gaming revenues in 2010 were only 36% of 1990 levels in real terms Strategy of Tourism Accommodation Units Not been successful for Grand Sierra and Montage Dramatic declines since 2007, because of Great Recession

    24. FUNDAMENTAL DRIVERS FOR THE LAS VEGAS STRIP GAMING MARKET Considerable diversification in the tourist product offering from 1990 onward Growing convention business, international visitors, locals’ market Largest tourist destination in America, if not the entire world Waves of mega-casino openings since 1989-90 Consolidation of major casino companies, especially since 2000 “Irrational Exuberance” by gaming companies, financial institutions, especially since 2004 Capital investments approaching $30 billion between 2004-2010; commitments made between 2004 and 2007 Belief that the Strip would evolve into a Tourist Accommodation Unit driven market in its next metamorphosis Rude awakening with the Great Recession

    29. IMPORTANT REALIZATIONS FOR THE LAS VEGAS STRIP, 2007-2010 The Great Recession (2007-2010) crippled most of the major American casino companies Collapse of real estate and commercial values in Las Vegas Commitments to major projects (CityCenter, Cosmopolitan) or to Leveraged Buy-Outs (Harrah’s, Station) created substantial debt loads => Cash flows inadequate to cover interest payments Harrah’s (now Caesars), MGM, Las Vegas Sands, Boyd were all near bankruptcy in 2009; Station Casinos, Trump, Riviera declared bankruptcy; M Resort sold for 25% of initial cost of $1b Macau, Singapore have saved the fortunes of Las Vegas Sands, Wynn; helping MGM; but no aid for Caesars There have been four mega-casino openings, one each December, since 2007, but with little impact on demand Too early to tell for Cosmopolitan

    35. IMPORTANT OBSERVATIONS ON THE FUTURE OF LAS VEGAS GAMING The end of the mega-casino era Growing belief Las Vegas growth (as we know it) is over Substantial shift in spending patterns for casino visitors in general and Las Vegas visitors in particular => The new frugality of the American public The Las Vegas economy remains one of the worst in the nation Reversal in population growth due to collapse of construction, weakness in gaming & tourism Locals’ casino sector in Las Vegas will remain weak Housing market may be years from recovery Growth in Baccarat revenues will not likely continue due to new Asian mega-casinos Macau (at $24 b) and Singapore (at $6 b by 2012) provide attractive alternatives for Asian High Rollers Taiwan, Japan, the Philippines, others may be adding new mega-casinos in the next decade Too many good alternatives for Asian VIP gamblers; Las Vegas will be too far away in comparison

    37. POLICY IMPLICATIONS FOR NEVADA We have no choice but to pursue new export industries, especially in Northern Nevada High value added industries need to be our focus Must have a tax structure that can support desirable economic growth Current tax structure is inconsistent with economic realities: Tax reform is more important for Northern Nevada than Southern Nevada Clearly, Northern Nevada’s casino industries will not be export sectors in the future Political clout will continually shift to Southern Nevada Nevada cannot be as dependent on a single industry for tax revenues in the future It is imperative for policy makers to realistically assess the needs of the State and implications of alternatives Fundamental reform of Nevada’s tax structure must reflect the demands of the kinds of industry we are trying to attract Desirable industries will demand a better educational infrastructure (K-12 AND University level) than we presently offer This indeed is Nevada’s greatest political and strategic challenge for the Millennium

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