Casino Industry in the United States and Parts of Asia - Case Study Example

Introduction This essay is a case study analysis of the external environment within which the casino industry in the United States and parts of Asia operates. The analysis is divided into two sections. The first one is the macro-environment analysis that explores the overall influences of the casino industry as well as their impact on the growth of the industry. The second one is the casino industry environment analysis, which assesses the factors within the industry that have an impact on both the industry’s profitability and the general competitive position of the existing casinos. This is followed by a discussion of the pertinent factors that affect the industry in general. From this, the essay sets a scope for the future direction of the casino industry by discussing some recommendations. Detailed information pertinent to the analysis and discussion is provided in the appendix section of the paper. Macro-Environment Analysis This analysis takes into account the general influences that impact the casino industry, and their corollaries on the growth of the industry. The analysis will consider the current political, economic, socio-cultural, demographic, sustainability and technological trends. The casino industry has experienced phenomenal growth since 1946 when Bugsey Siegel opened the first of the contemporary casinos. The sparkle of the industry over the past years cannot be gainsaid. Clearly, the industry has been one of the most dynamic segments of the leisure and tourist industries for over the last quarter of the 20th century (Gartner & Lime, 2000). Nevertheless, it is difficult to forecast the trends of the industry in the present day. Hence, it is worthwhile to speculate the implications of the current trends in casinos and casino-style gaming (Gartner & Lime, 2000). The Las Vegas casino industry has since 1989 with the opening of The Mirage. In the 1990s the industry grew with three waves of new mega-casino resorts that offered a variety of attractions and amenities going beyond conventional casino products. Other casino resorts that have been famous in this dimension include Luxor, Excalibur, New York New York, Treasure Land, Stratosphere, MGM Grand, Monte Carlo, Mandalay Bay, Bellagio, Paris, The Venetian, and the Aladdin. Las Vegas grew tremendously as a destination resort area that centred on casino gaming. Of late, Las Vegas has grown as a multifaceted entertainment and convention centre. The intensity of the city’s transformation was evident in the rapid construction of casino gaming facilities. For instance, between 1998 and 2000, six major investment projects were initiated with an estimated expenditure of nearly US$8 billion. The present day state of the casino industry is somewhat a mirage of what existed in the 1990s to and towards the new millennium. The tremendous growth was halted in 2009, thanks to the credit crunch and the global economic slowdown that was witnessed in the same period. This made it difficult for many firms to raise the required capital to finance ambitious projects, in turn forcing them to re-evaluate their strategies. Construction projects of many multi-billion dollar casinos have been halted, a good example being the ambitious construction at Echelon place that was estimated to cost $4.4 billion. Many other investments such as MGM Mirage are still wallowing in a miasma of difficult decision-making. However such projects have been adversely affected by the drop in condominium units, a situation that was brought about by a drop in real estate prices. Hence, the casino industry has been forced to scale down the scope of many projects. The factors highlighted above and many others have led to a sudden shift in the popularity of the casino industry in Las Vegas. For instance, dwindling economic conditions have forced many potential visitors to cancel their travel plans and seek for gambling areas that are closer to the places where they live. This means that the period during and after the global economic crisis has not been smooth for the casino industry in Las Vegas. In addition, gaming has been allowed in 20 states in the United States, and this has significantly increased competition among casinos. In particular, more innovative ideas such as the creation of riverboat casinos and the existence of Native American casinos have added more verve in the competition. Moreover, casino gaming is generally being regarded as a popular activity for a night out. In addition to the increased competition in the United States, some issues have been raised over the development of casinos outside the United States. More gambling sites have emerged outside the United States, with Macau being on top of the list. Key gambling sites in Macau include Sands Macau, which was made with a Las Vegas-design in 2004. Other major properties include Wynn Macau and MGM Grand Macau. In spite of these developments, Macau does not equal Las Vegas in terms of offerings such as theatre shows, entertainment, shopping and fine dining. The rush to expand the casino industry in Las Vegas during the brighter days suddenly led to the existence of many half-completed structures at the dawn of the economic downturn. Some of such structures include the St. Regis Residences, which is located between Palazzo and Venetian resorts. The existence of such structures indicates a bright future for the casino industry (that is if the construction activities are completed according to the initial plans) but is also a stark reminder of the vulnerability of the casino industry to occurrences such as the global economic crisis that nearly brought the industry to its feet. Within the United States, Atlantic City has been a major force to recon with in terms of competition. Atlantic City existed for most of the decades as the only casino centre in the north-eastern United States, and catered mainly for a “day tripper” market (Gartner & Lime, 2000, p. 162). But like Macau, Atlantic City has remained far behind in terms of what it as to offer to casino gamers as highlighted above. Competition issues aside, there are major unpredictable factors that affect the casino industry. Terrorism has been a major factor hampering the free travel of casino gamers. Another issue is natural calamities such a as hurricanes and earth quakes. Several of the casinos located along the Gulf Coast were severely damaged or destroyed by Hurricane Katrina. The resulting devastation was countered when Mississippi lawmakers passed a law in 2005 to allow casinos to operate up to a proximity of 800 feet from the shore. This, it was noted, would allow them to have a stronger foundation to withstand future hurricanes. But the good news is that most of the casinos that were devastated by the hurricane had reopened by the beginning of 2007. What matters therefore is how such casinos managed to go through another major test that was the global financial meltdown. In spite of the uncertainties surrounding the casino gaming industry, there has been a notable increase in revenue accruing due increased technology. Worthy noting is the fact that there has been a growing popularity of slot machines. Along this line, coin-operated machines characteristically account for over 60 percent of all casino gaming income. The key reason for their popularity is that it is easier for potential gamblers to feed money into a slot machine than to understand the rules of various table games. There are also prospects that with the advent of technology, there will be server-based gaming that will allow games on slot machines to altered or updated from a central system. Waterborne casinos have also emerged as a result of changes in technology. Industry Environment Analysis Porter’s five forces model that analyses the opportunities and threats to which an industry is subjected is essential for evaluating the casino industry. This model is applicable once the boundaries of an industry have been identified (Hill & Jones, 2009) as highlighted above. According to Hill and Jones (2009), the model touches on a number of issues pertinent to the casino industry, namely the risk of entry by potential competitors, the intensity of rivalry among established firms within the industry, the bargaining power of the buyers (in this case casino gamers), the bargaining power of the suppliers (in this case casinos), and the closeness of substitutes to an industry’s products. The risk of entry of potential competitors may appear as not so much of a significant issue. This is because although casinos have spread across much of the United States, only two cities have dominated the casino business. These, as mentioned earlier, are Las Vegas and Atlantic City. Both Atlantic City and Las Vegas have witnessed tremendous growth in casino gaming revenues over the years. A notable aspect of the industry is that although Las Vegas generally has more hotel casinos as compared to Atlantic City, the casinos in Atlantic City generate far more revenues. This means that Atlantic City is progressively positioning itself as a major casino gaming venue that may overtake Las Vegas over time. This is coupled with the competition that is currently being posed by other major casino gaming destinations such as Macau. The competition between Las Vegas and Atlantic City can be said to be a harbinger of fortune as the income accruing from casino gaming in the two cities has made a significant contribution to the economy of the United States. It noteworthy that the two cities combined accounted for around one-third of the total revenues earned from all forms of casinos all over the United States. Thus, it can be noted that while competition can be a threat to individual casino gaming firms, it is generally a boon for the entire industry going by the overall outcome in terms of generally higher revenues for the entire industry. Las Vegas is a magnet for night time casino gamblers, and offers close to 140,000 hotel rooms and a variety of choices for dining, grand shopping, and high-class entertainment. This enables the casinos to generate income by offering a wide range of activities that are not necessarily related to gambling. For instance, at MGM Mirage, revenue accruing from nongaming activities accounted for about 60 percent of the net revenues realised in 2008. Las Vegas is in a vantage position to attract more casino lovers as it is linked by air to several major cities in the United States and the world at large. In order to fend off competition, Las Vegas has over the years employed a number of strategies. For instance, in the 1990s, the city tried to be more receptive to families, by employing the use of facilities such as animal reserves, circus performances, and pirate battles. But that did not salvage it from its traditional repute a sinful city. The sinful state of the city, with a stronger leaning towards topless shows, hot night clubs and many other adult offerings seem to be an added advantage to the city’s casino gaming activities. This is emphasised by a common slogan about the city: “What happens in Vegas stays in Vegas”. Casinos also strive to maintain their business by offering complimentary rooms, beverages, food, shows and other additional perks that are worth billions of dollars every year. Thus, more and more people feel the urge to visit Las Vegas, and this is to the benefit of the casino industry. Despite the increasing rivalry for casino gamers, Las Vegas has maintained its position as a leader in providing what prospective casino lovers want, with an ever-growing trend of number of visitors. The head of marketing for the Las Vegas convention and visitors authority did not err when he noted that the city still competes effectively with New York and Orlando. In fact, Las Vegas’ strategy to attract more overnight gamers was one of the brightest ideas as it has made the city a more famous with respect to casinos. Presently there are additional facilities in major resorts such as Bellagio, Mandalay Bay and Venetian. This coupled with major renovations is older properties such as Caesars Palace, which now has additional facilities such as a Roman plaza and a coliseum. Thus, it can be noted that there has been an effective balance of the bargaining power of both the supplier and the consumer by Las Vegas being able to effectively provide what casino lovers want in entertainment and gambling. Critical Factors for the Casino Industry Several factors are pertinent to the success of the casino industry. As it was noted above, casinos are keen to attract more customers by availing more offerings. This has been achieved through massive investments in supplementary perks and the desire to have unique premises that on their own serve as attractions to visitors. But the additional perks and facilities come as added costs to casinos. It is therefore critical that a way be found to attract more visitors without necessarily having to incur exorbitant costs. The effects of the recent global economic downturn are just beginning to fade and one way to ensure a successful transition is to ensure that spending is put at the lowest level. The effects of spending have been significant as some casinos have been forced to file for bankruptcy. Many casinos have attempted to eschew competition by growing through mergers. For instance, in 2004, Harrah’s announced its decision to buy rival Caesars, and this made Harrah’s the leading operator of casinos, with many properties on both Atlantic City and Las Vegas. MGM Mirage also stated its intention to acquire the Mandalay Resort Group. Mergers in the casino industry can therefore be seen to be cushioning small casino groups from collapse, but at the same time, the trend limits the scope of competition since only giant groups (some resulting from the mergers) are left to compete. In addition the trend toward consolidation through acquisitions has not been received well by smaller firms that operate only one or two resorts that appeal to particular types of customers. The use of machines in casino gaming comes as a major challenge to the industry. Several states are in the process of passing legislation that allows the use of racetracks to raise their income by offering slot machines for visitors. This has also increased the popularity of gaming in the states where such laws exist. Another issue that was unravelled in this paper was server-gaming. All casinos are keen to support and utilize the growth of gambling on the Internet. Even though the United States has banned internet gambling, there are some 2,000 offshore websites that generate about $15 billion through the activity. Electronic systems of payment have enabled gamblers in the United States to bet in these sites without cash cheques or credit card, and hence avoid the legislation that prohibits Internet gambling. It is therefore worth asking whether gambling will remain an inside-casino issue or will spread to the Internet and be a popular activity the world over. Future Directions/Recommendations The casino industry appears headed towards a bright future despite the recent economic crisis that deprived it of the critical success factors due to low number of people willing to travel to the popular gaming sites. This was worsened by the fact that many new projects to set up state-of-the-art gaming venues were halted. But as it can be noted in by analysing the case in Las Vegas, success of the industry lies in targeting what casino visitors want. Hence, investors in casino gaming should target more entertainment venues and actually offer the required entertainment. It is also imperative to provide requites for gaming visitors, such as accommodation, superb dining, and other appropriate perks that keep the visitors around for longer periods. The use of the internet in gaming cannot be gainsaid. To popularise the game around the world, a way should be found though which lovers of theirs games can play from the comfort of their rooms by visiting their popular casinos’ website. The use of server-gaming should be employed to ensure that the games are controlled by the relevant casinos and that both casino operators and online players adhere to the appropriate code of casino gaming. APPENDICES Appendix 1: Macro Analysis Factor Issue Impact on industry Overall effect Political -Gaming is now allowed in 20 states -Inability to secure capital for construction -Casino gaming is becoming more and more popular. -Most construction activities for casino gaming venues have been halted. -Positive -Negative Economic -Drop in demand for condominium -Deteriorating economic conditions due to economic meltdown -Falling prices of real estate, forcing the casino firms to scale down their scope of operations -Less travel, implying fewer people visiting casinos -Negative -Negative Technological -Introduction of slot machines -Advent of waterborne casinos -Increased competition - Waterborne casinos have gained popularity and generating a lot of revenue to the economy -Negative -Positive Socio-cultural -Introduction of more nongaming activities in casinos- -Development of gaming that requires more intellect. -More and more people are visiting casinos for reasons other than gaming Casino gaming has become popular among people who are better educated than lottery buyers -Positive -Positive Demographic -There is a tendency for casino visitors to be aged adults -Median age is around 47 years Sustainability -Better payouts from the industry -The industry is one of the leading contributors to annual revenue -Positive Appendix 2: Industry Analysis Factor Issue Impact on industry Overall effect Risk of entry by potential competitors -Las Vegas faces competition from other major destinations such as Atlantic City and Macau -Increased competition, hence provision of more perks to prospective casino visitors -Positive Intensity of rivalry among established firms within the industry. -Established casino operators have employed strategies to win more prospective casino visitors such as additional perks. -There is a tendency to maintain the status quo of existing and established casino resorts at the expense of upcoming firms -Negative Bargaining power of the buyers -Casino operators aim to bring services closer to the people they know are the target market, such as availing more overnight gaming venues. - Travellers are able to encounter gaming opportunities in addition to seeking dining or accommodation. -Positive Bargaining power of the suppliers -Many casino operators have opted to hold the market by combing their efforts though mergers and acquisitions. - This has enabled many casino operators to survive in the competition due to economies of scale -Positive Closeness of substitutes to an industry’s products -There are prospects of using more slot machines and availing casino games on the internet. -Increased competitiveness of casinos. More revenue likely to be earned. -Positive References Gartner, W. C. & Lime, D.W. (2000) Trends in Outdoor Recreation, Leisure, and Tourism, CABI, New York. Hill, C. & Jones, G. (2009) Strategic Management Theory: An Integrated Approach (9th edition), Cengage Learning, New York. Read More