As casinos cut room rates to levels not seen in more than a decade, the business model gaming company it has followed for decades has turned into an unstable balancing act. Cheap rooms have been an absolutely safe way for gaming CEOs to fill casinos with gamblers and keep profits even during the downturn. But some strip resort operators have found that cutting room rates in this economy can hurt their bottom line more than keeping fewer gamblers on slot machines. MGM Mirage’s latest earnings report, a barometer of the overall state of the strip, shows just as much. While the company’s budget and mid-range properties were hugely profitable due to inflated hotel rates during the boom, the property’s low room rates are now dragging down its profit margins.
In an interview last week, MGM Mirage CEO Jim Mullen said about 70% of the company’s year-over-year drop in revenue in the fourth quarter came from lower room revenue and profit. For every percentage point drop in hotel occupancy rates, the company makes a profit of $3 million per month. At the same time, for every $5 drop in average hotel rates, the company makes a profit of nearly $6 million per month. “There’s huge operating leverage, positive or negative, because of the actual department,” Murren said. Merren said the company is committed to keeping rates as much as possible, and hopes to raise rates slightly based on improved business trends, which will allow lost profits to flow quickly into earnings once again.
Experts acknowledged that in this economy, resort management does not have many options to choose from. But they warned that sacrificing room rates to increase accommodation is a tricky balancing act that could backfire the longer it lasts. “They are earning a low return on their investment,” said Tony Henson, the president of UNLV’s Tourism and Convention Agency and the William F. Hara Hotel School of Government Administration. “But it’s not a little money-for-money. The whole idea is to have customers who put their bodies in a room and spend money on something else.” 온라인카지노
But the longer the price cuts last, the more damage a company’s brand will suffer and it will be harder for interest rates and profits to return to pre-recession levels, Henson said. What the hotel industry calls “price integrity,” or maintaining prices, allows hotels to recover faster when the economy turns. This will be key to MGM Mirage. MGM Mirage can quickly recover lost revenue to a progressively higher return. Experts said discounted room rates at the new luxury resort limit rivals’ ability to charge more for their rooms.
Opened in December, Angkor is offering discounts as Las Vegas’ most luxurious casino resort. Opened at a low rate of $150 per night, Angkor currently advertises a rate of $159 per night, and a two-night stay will give customers $50 in credit on other purchases. Experts say customers are more likely to enjoy luxury properties at a cheap price than to save a few dollars by staying in an affordable hotel. In Las Vegas, scaling up luxury is especially easy because competition is focused on strips.
The trend appears to be coming from MGM Mirage, which owns most of the large casinos on Streep, as well as the most diverse properties, including low-cost circus circus, mid-level MGM Grand and luxury Bellagio. Bellagio, the company’s most luxurious property, held a 93% share in the fourth quarter, less than a percentage point lower than a year ago. Meanwhile, other properties saw double-digit declines.