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Gambling News by Gambling Headquarters

Tuesday, April 11, 2006

Vegas Boom Going Upscale

 

The Las Vegas building boom under way will usher in a slew of new luxury properties over the next five years, continuing a transformation from Middle America playground to the desert version of Southern California and Miami Beach resort enclaves. It is the biggest development binge in Las Vegas history, and it is based on something no one talks about: fearlessness. The prospect of adding 40,000 hotel and condominium units in other major cities would set off alarms about overbuilding.

While some anxiety exists in Las Vegas, particularly about the overhyped condo market, it has been overshadowed by a drumbeat of optimism from casino operators, analysts and even investors who say Las Vegas has proven skeptics of past growth spurts wrong and is even better prepared this time around.

The latest boom is based on a unique phenomenon in the hotel industry. Las Vegas builds upscale resorts, lots of them, and watches them sell out. It's a trend that goes back nearly two decades.

This time, as if to tempt fate, the new resorts and casinos will be so expensive that they will be out of the reach of many middle-income visitors who visit Las Vegas regularly. But investors and casino operators are confident that for every tourist priced out of the Strip, one or more new, higher-income visitors will come to replace them.

That expectation is rooted in a belief that a worldwide market exists of visitors with expensive tastes who have snubbed or overlooked Las Vegas in years past.

Now, they are a primary and growing target market for the new Las Vegas projects, which include some of the most expensive buildings in U.S. history.

"It's not a shift in the economy, it's in part a marketing shift," said Keith Schwer, director of the Center for Business and Economic Research at UNLV. "We are marketing to different people," especially wealthier customers. "We have hit upon a responsive market and people are demanding it."

On the supply side of the equation, Las Vegas has reinvented itself in a dramatic way by building ever more luxurious and architecturally appealing resorts. That trend will continue in the next few years as Wynn Resorts Ltd. and Las Vegas Sands Corp. build even more upscale resorts than their existing Wynn and Venetian casinos.

Plans for MGM Mirage's $7 billion CityCenter - a collection of resorts and condominiums - have already wowed critics along with the project's group of renowned architects, who are known for designing iconic buildings in major cities around the world.

Boyd Gaming Corp.'s $4 billion Echelon Place will also feature distinctive elements, including the Las Vegas version of boutique hotels with roots in Los Angeles and Miami.

"In supplying new and creative things we've created demand for them," Schwer said.

While Schwer uses information such as population and housing sales to forecast the growth of the Las Vegas economy, tourism growth on the Strip is more difficult to predict using standard formulas.

"If I knew how long we could reinvent ourselves I'd have a much better idea how Las Vegas would be after I'm dead," he said.

There's more to marketing than the $82 million that the Las Vegas Convention and Visitors Authority will spend on advertising for the year ended June 30 - more than any other city in the country and the combined budgets of top destinations such as Hawaii, Florida and New York.

It's also more than the explosion of television programs and reality shows that show Las Vegas at its most exciting, sexy and irreverent.

Casinos now have point-of-sale monitoring systems that can adjust everything from slot payouts to souvenir prices. They have growing customer lists and more sophisticated ways of tracking spending patterns as well as offering discounts to repeat customers. This information-gathering has become more advanced as casino companies have consolidated, creating more expensive tracking systems for larger customer lists.

Hotel yield management systems also have become more sophisticated in recent years, allowing operators to raise prices sharply on weekends when demand is high.

"There's no trial and error - this is a science," said Bill Carroll, an economics professor at the Cornell School of Hotel Administration. "They study this day in and day out."

Hotels now analyze how customer segments respond to price increases, such as leisure travelers who book trips online versus those who book through a travel agent, Carroll said. They also are comparing their rates to other Strip properties, and to hotels in other resort cities.

Such technology allows hotels to arrive at a pretty accurate picture of what customers are willing to spend to come to Las Vegas.

"Casinos have found that customers are more tolerant of price increases than they were before," said Bill Eadington, director of the Institute for the Study of Gambling and Commercial Gaming at UNR.

Once tourists are here, Las Vegas is able to satisfy a strong desire by all ages to see and be seen, said Eadington, an economics professor.

"There's a long history in Las Vegas of conspicuous consumption, he said. "It's the kind of place where you can demonstrate your command over financial resources."

Las Vegas has become "the place to be, especially at the higher end," he said. "It's like skiing at St. Moritz and Louis Vuitton."

Many of these customers with a desire to spend are newer to Las Vegas. They include Baby Boomers with money to burn as well as young people of all incomes.

Skip Fortier, who oversees travel and vacation business for MacNair Travel American Express in Alexandria, Va., said many of his customers are businesspeople heading to Las Vegas for the first time.

And they're not thinking twice about the cost.

"Las Vegas is my No. 1 destination," Fortier said. "We're seeing people who would only stay at a Four Seasons property staying at the Wynn. They wish they would implode all the lower-end resorts and start bringing in more Wynn resorts."

Twenty-two percent of Las Vegas visitors had household incomes of $100,000 or more, up from only 13 percent in 2004, according to the Las Vegas Convention and Visitors Authority's 2005 visitor survey. It was the highest income bracket measured in the survey, released last week.

Gambling revenue alone rose 13 percent on the Strip last year. That was the largest increase since 1999 after the Strip added Bellagio, Paris, Venetian and Mandalay Bay - the largest number of hotel rooms built over the shortest period.

"There was a fundamental shift from lower to higher income customers," Schwer said. "They are coming here and spending more."

For the young crowd, Las Vegas' appeal is fueled by television shows, regular celebrity appearances and the age-old desire to show off in public.

Once shunned by casinos for their relatively small bankrolls, young customers are now opening their wallets in expensive nightclubs and lounges as well as playing table games, a pastime fueled in large part by televised poker.

They are a different breed from their parents and grandparents who remember Vegas as a gold mine for rock-bottom bargains. And these younger visitors will potentially grow into long-term, brand-conscious customers.

"People want to be big shots," said Michael Politz, editor of Las Vegas Food & Beverage Magazine. "They want to be high rollers. They save all year to buy a bottle at a nightclub in Vegas. They're spending their paychecks and they're happy to do it."

In some cases, higher prices themselves will create demand.

UNLV marketing expert Seyhmus Baloglu calls this phenomenon the "price-quality relationship."

"If you increase the price, the expectation is that you will get more quality," said Baloglu, associate dean for research at the William F. Harrah College of Hotel Administration. "The other side of the story is that you will get the quality you expected."

The casino industry welcomes the luxury trend. Wealthier customers are more profitable. Middle-income customers will still have a choice of several, more reasonably priced hotels - although the numbers of those on the Strip will decline. While occupancy rates have remained relatively steady in recent years, room prices have soared. Rates across the valley have risen 34 percent since 2002 to an average of $103.12. Strip rates, which aren't tracked by the LVCVA, are much higher. Last year, visitors spent 15 percent more on rooms, 5 percent more on shows and 10 percent more on shopping. Average gambling budgets rose 15 percent last year, according to the LVCVA. Yet for all the fearlessness behind the building boom, there are some cautions.

"These companies are making long-term bets on the continued strength of the economy and visitation in Las Vegas," said Brian McGill, a stock analyst with Susquehanna Financial Group. "I don't think anybody knows for! sure what the total capacity will be in 2010 and what the demand will be four to five years from now to support the increase in supply. We only know about a portion of the potential supply out there."

Marc Falcone, a stock analyst with Deutsche Bank, said Las Vegas has a "strong, proven track record" of filling additional hotel rooms to capacity and believes the market is still underserved. Las Vegas has the "highest occupancy of any major metro city in the world relative to its room base" even after adding some 60,000 or so rooms over the past 15 years, Falcone said.

For long-term forecasters such as Schwer, Las Vegas' track record - compared to business cycles of 100 years or more in other major cities - is a fairly short measuring stick. "It seems so unique because we've had such strong growth over a brief period of time," he said. "We're now an international city with international name recognition.

"Right now everything is going right, very right," he said. "We're in the right business at the right place at the right time."

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