It has been the worst of times in recent years for two cities that once prospered from the casino gaming industry. Las Vegas was booming until the recession, and while customers have been returning, they appear disinterested in throwing their money into slot machines. The other city, Macau, while less hard hit by the global financial crisis, has for the first time experienced a decline in growth as the Chinese government has begun to crackdown on the illicit activity that the eastern gambling mecca has become known for. While the problems of the two cities appear distinct, the truth is that they are both suffering from the disappearance of their traditional consumer bases. Hope for future prosperity will mean catering to the preferences of a different set of consumers.
A strong casino industry, with the help of low taxes, a thriving real estate market, and plenty of jobs, made Las Vegas the fastest growing city in America for most of the decade leading up to the recession in 2008. Yet, comparatively, Vegas suffered more from the financial crisis than any other U.S. regional economy. In hard economic times it becomes a challenge to convince people to gamble with what little money they have.
After a number of years hobbling along there is some hope on the horizon for Vegas, but perhaps not for what the city is best known for. The last fiscal year saw improvements in all areas of the Vegas Strip's revenue, except gambling which has accounted for less than 40% of total revenue in recent times. While this decline may be partly due to the recession, there is another contributing factor: the new millennial consumer. (For more, see: 5 Money Saving Travel Tips For Las Vegas.)
The Millennial Consumer
Millennials, consisting of those born between 1980 and the mid-2000s, constitute the nation’s largest generation at one-third of the U.S. population. They are the first generation to have grown up with the internet during its crucial, formative years, are the most diverse and the most educated generation, and while many reached adulthood during a difficult economic era, Millennials will be responsible for the future direction of the economy. They also, apparently, don’t gamble much.
It is not a moral issue for Millennials, but a social one. As Millennials look for meaningful experiences that promote greater social interaction and cohesion, traditional casino spaces and games, especially slot machines, offend these millennial social sensibilities. While games like poker and blackjack involve a slightly greater degree of sociality and skill, in the minds of most Millennials, the primary thing casino’s offer - their physical space - is just downright unattractive.
Corruption Crackdown in Macau
Across the Pacific Ocean, the Chinese region of Macau, whose gambling revenue surpasses that of Vegas sevenfold, has its own set of issues to cope with. While taking a hit in late 2008 and early 2009 it was not long before Macau’s gambling revenues rebounded. However, things are taking a turn for the worse: Macau’s revenues dropped 49% in February from a year earlier, and China’s recent corruption crackdown is responsible.
To understand the nature of the corruption of the Chinese gambling scene it is important to note that the majority of Macau’s casino revenues come from wealthy visitors from other regions in China betting hundreds of thousands of dollars in VIP backrooms. The problem, however, for the casino industry is that as Macau is its own distinct region, there is a legal limit on how much money can be taken out of China at any one time ($3,300 per visit up to a maximum of $50,000 a year).
To sidestep these limitations, well-connected middlemen known as ‘junket’ operators, use illicit banking networks to provide temporary funding for high-stakes gambling. Junket operators attract high-rollers by offering flights in private jets, limousine service, luxury suites, and most importantly, extending them credit to gamble. Debts are then collected back in China and the government is none the wiser, at least until the recent crackdown. (See also Investopedia's entry on Macau.)
The Bottom Line
For both Vegas and Macau, any return to the glory days will mean diversifying business strategies in order to cater to a new set of consumers. In Vegas, casinos will need to rethink the design and layout of their gaming space in order to make it more socially interactive and meaningful to millennial consumers. This may include ousting the slot machine or at least limiting their numbers.
Macau, while not facing the challenge of consumers disinterested in gambling, may have to start shifting its focus away from the elite towards China’s middle class. There is significant growth potential here considering the ever-expanding middle class, and the fact that profit margins on VIP consumers are significantly less than on average consumers due to expenses doled out for attracting the high rollers.