High Stakes in the US Casino Industry

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Considering the number of politicians and businessmen who claim fealty to the principles of market economics, it’s almost surprising how few of them seem to be able to understand the laws of supply and demand.

Adam Smith got it right back in 1776: when supply exceeds demand, prices go down, and so do profits. This happens fairly routinely. In New York, and in fact most of the mid-Atlantic states and one location in California, Crumbs Bakery has shut its doors, a victim of the misguided belief that Americans had an insatiable appetite for cupcakes.

The Magnolia Bakeshop is still apparently doing well with 14 locations, and the Food Network is still showing Cupcake Wars, where bakers compete to make the best cupcakes. There’s still an interest in cupcakes, it’s just not as great as the people behind Crumbs seemed to think.

Maybe it’s just that there aren’t enough creative ideas for making money.  When Ron Johnson nearly trashed JC Penney with a program that eliminated sales and coupons in favor of a low price policy, he was simply following in the footsteps of Edward A. Brennan who transformed Sears into a discount store with “everyday low prices” in 1988.  The format works well enough, but the people who respond to that approach were already shopping at Wal-Mart.

The latest failure, this one a joint effort between business and politics, has been the failure of casino gambling.

For decades, politicians had laws prohibiting gambling of almost any sort, based on concepts of morality.  Nevada was effectively the only state that had legal gambling, and Las Vegas became a center of entertainment and fine dining, all financed by the one certainty in mathematics: you can’t beat house odds.

At the same time, there was a growing opposition to taxes. Politicians of both parties were afraid to raise taxes and looked for alternatives.  For a while they settled on user fees – prices for licenses went up, and fines for traffic violations jumped.  When that wasn’t enough to keep things in balance, they did just about the last thing possible – they legalized casino gambling.

The model, of course, was Las Vegas.  Starting in the 1940s, Sin City was the adult playground of the United States.  The casino hotels built in the 1940s and 50s included the El Rancho Vegas, Hotel Last Frontier (later the New Frontier), Flamingo, Thunderbird, Desert Inn, Sahara, Sands, Riviera, Dunes, Hacienda, Tropicana, and Stardust.  The city drew the top acts and most famous chefs.  Gordon Ramsay has three locations, Emeril Legasse has four, as does Wolfgang Puck. Other television chefs include Guy Fieri and Bobby Flay.

The top entertainers play Las Vegas, and some, Penn & Teller, Siegfried & Roy and Wayne Newton are noted for not performing anywhere else.  But while people were drawn to see Frank Sinatra and Dean Martin, the goal was to get visitors to the casinos for blackjack, roulette, dice and increasingly the slot machines.

According to the University of Nevada at Las Vegas Center for Gaming Research, “From 1984 to 2013, there have been tremendous changes in Nevada’s gaming industry, many of which are reflected in its annual revenue figures. During that period, statewide total revenues have increased by 254%, with slot revenues growing at about double the rate of table game revenues.”

But while this growth was unquestionably attractive to other states, the numbers not only failed to show steady growth, they had already gone into a downturn.  The Las Vegas Sun reported, “Nevada’s biggest casinos lost $1.3 billion in 2013.”

The Las Vegas Review Journal reported, “Nevada casinos post fifth straight fiscal year net loss.”  While this number applies to the entire state, strip casinos, the major casinos in Las Vegas, showed a 1.7% increase in revenues, but a net loss of almost $1.5 billion for the year.

While the promise of gambling income has declined almost everywhere, perhaps the worst has been New Jersey’s Atlantic City, which has fallen faster.

Atlantic City had once been a popular summer resort, but air conditioning cut into the summer trade, and discount airfares made it possible to visit more exciting destinations.  In an attempt to revitalize the city, casino gambling was legalized in 1978, and for a while it seemed as if Atlantic City would be the East Coast mirror of Las Vegas.

The same corporations that built their casinos on the Las Vegas strip built mega casinos in Atlantic City, but it never really worked.  Perhaps the people of the East Coast prefer to lose their money on Wall Street, but Atlantic City ultimately became a bus trip destination for New York seniors who would lose their budgeted $25-50 and then walk on the boardwalk.

Beyond that, competition started, first from Native American casinos and from other states.

Gambling revenue in New Jersey has dropped 44% since 2006.  The Atlantic Club closed last January and Trump Plaza is scheduled to close. Two more Atlantic City casinos are likely to shut their doors this autumn.

The Margaritaville Casino in Biloxi announced that it would be closing this summer, and Argosy, a gambling riverboat in Sioux City Iowa is prepared to close.

Hollywood Casino, in Columbus, Ohio is still in business, but is cutting back on the number of slot machines by 17% due to weak demand. According to Bloomberg BusinessWeek, “Ohio’s budget office issued a memo on March 19 warning local governments and school districts, which receive the bulk of the state’s gambling tax revenue, to budget conservatively and “not be surprised” when forecasts fall short…. Competition for gambling dollars is increasing, both within and without the state, and there is evidence across the nation that overall gambling may be approaching saturation levels…”

The economics were inevitable, but still ironic.  The expansion of casino gambling was a political response to the economic downturn.  Nobody expected Terrance Watanabe (who lost $127 in Las Vegas) to visit Biloxi or Sioux City, but the states did expect blue collar and middle income people to come lose their money while appreciating the fact that they hadn’t been faced with a tax increase.

The irony, of course, is that these were the people most hurt by the downturn, who have gained least from the recovery.

At the same time Las Vegas, and to a lesser extent Atlantic City, were destinations that could draw on several states, where people would spend several days going to shows, drinking and gambling.  Tunica, Mississippi, with a median family income of $54,000, may not have been the best place to find high rollers and yet it became the third largest gaming region in the United States.

The county came to rely on the casino industry for jobs and income, but on June 2, 2014, Harrah’s Tunica casino closed because of “…declines in business levels in the area stemming from increased competition.”  The casino employed 1,300 people.

Supply and demand is one of the basic truths of economics, and you can no more beat that reality than you can beat house odds.

 

About Sam Uretsky

Sam is a trained pharmacist and freelance writer with degrees from Columbia University and the University of Michigan. He lives in Long Island, New York, with Kandi the Cocker Spaniel and Minerva, a cat.
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