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FRAT BOYS AND LAS VEGAS

Demand for Las Vegas is indeed elastic.  Drastic room rate cuts have improved visitation sequentially.  The nightlife impact has been noticeable.  In fact, anecdotal evidence suggests that the clubs are actually booming right now.  Unfortunately, that is the only part of the business that is doing well, unless you count crowded buffets.

We know room rates are down.  Lower visitation and gaming spend per visitor have driven down gaming revenues.  Despite the higher club and buffet activity, restaurant covers appear to be way down.  The best explanation I've heard is from a client following his recent visit.  He speculated that younger adults are packing in 4 people to a room and spending what little cash they have on the necessities:  buffet food (optional), club cover charges, and booze.

The following chart shows the departmental profit margin at Las Vegas casino hotels.  The huge margin expansion experienced over the last 15 years has been driven exclusively by Food & Beverage and the Hotel, coinciding with the nationwide housing boom.  Hotel pricing has been under the most pressure and given the falling demand, F&B may very well be too.  We first introduced this chart way back on 06/22/08 with our post, "MEAN MARGIN MEAN REVERSION".  The argument back then was that the most discretionary segments (hotel and F&B) were most at risk and Las Vegas margins had peaked.

FRAT BOYS AND LAS VEGAS - LV departmental profit margins 

The key then and now is housing and the wealth effect.  Housing was already falling throughout most of 2008 and with a little statistical analysis we showed that rising housing prices were the number one macro driver of the gaming boom over the last 15 years.  Housing prices are still falling and I'm not sure the housing related wealth decline has reached its full impact on consumer spending.  The 4% national savings rate is high by the standards set during the housing boom, but very low relative to the high single digit rate averaged during the pre-1995 period.

Las Vegas was a prime beneficiary of the housing bubble both in terms of pricing and margins.  Anyone who has consistently visited the city over the last decade can attest to the price inflation.  I certainly can.  Hotel rates and F&B pricing used to be "loss leaders".  They may soon be again.