December 5, 2020

Year Ahead a Gamble for Casinos

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Casinos-story-e1355150027492by Ashley Kindergan The Finacialist

New casinos have been popping up all across the United States in the last few years, creating new gaming markets in places where state governments have welcomed new revenue sources to bolster their strained budgets.

But the picture isn’t universally rosy. New casinos are luring customers from some long-established gaming destinations, and stubbornly high levels of unemployment have made many consumers think twice about using their extra cash to gambling.

“Because gaming is a fairly mature industry in the U.S., we’re going to need a stronger economic recovery, particularly lower unemployment, to see much stronger trends within the industry,” Joel Simkins, an analyst at Credit Suisse who covers gaming, lodging and leisure, told The Financialist.

In a research note entitled Back To School — Lessons From 2Q12 Earnings, Simkins said a return to the carefree days of 2006 and 2007, when people tapped home-equity loans to fuel their spending, remains unlikely. But a continued recovery in the housing market could help both regional casinos and Las Vegas, one of the areas hardest hit by the housing bust, he wrote.

Aside from macroeconomic challenges, the landscape of the gaming industry has been changing fast. Places like Pennsylvania and Ohio, where four casinos opened this year, have already seen major expansions. Massachusetts legalized casino gaming a year ago, and Maryland voters gave the nod to a gaming expansion this November.

“There are some new markets like Ohio, Maryland and Kansas that are still very much in ramp-up mode, but you have a number of markets like Atlantic City that are facing more structural issues because of increased competition,” Simkins said.

New casinos are getting pricier, Simkins noted, with some of the proposed projects in Massachusetts carrying price tags north of  $700 million. Meanwhile, building a world-class facility is no longer, in itself, a guarantee of success.

“It’s no longer a case of, ‘If you build it, they will come,’” Simkins said.

An Atlantic City casino called Revel provides a high-profile example. The facility, billed as a hot, high-end destination when it opened in Atlantic City earlier this year, is losing money and recently requested a cash infusion from investors.

But the problems of Atlantic City’s gaming industry run deeper than one casino. The city’s gaming facilities were struggling to keep up with increased competition even before Hurricane Sandy crashed ashore this fall, doing serious damage to city infrastructure and shutting off power for several days.

The steady stream of new casinos opening in Pennsylvania over the last five years, including the SugarHouse Casino in nearby Philadelphia, has created new options for area gamblers. The City of Brotherly Love is now reviewing bids for a second casino.

New Jersey’s northern neighbor could also become a tougher competitor down the road, Simkins said. New York Gov. Andrew Cuomo has advocated for a constitutional amendment to allow commercial gaming in the state, a move he estimated could generate $1 billion in additional economic activity.

The bottom line, Simkins said, is that people prefer to gamble close to home. Making a trip to the casino more convenient for Pennsylvanians and New Yorkers doesn’t bode well for an Atlantic City recovery.

That’s why New Jersey state officials are fighting to shore up the state’s position by legalizing sports betting. Only time can tell whether the gamble will work.

“The consumer will always choose convenience,” Simkins said.

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Photo courtesy of Craig Howell (Flickr–El Caganer)

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