Recession-Proof?

We’ve heard the suggestions many times since the proliferation of gaming started in the early 1990s. Some analysts have insisted that casinos are “recession-proof” because their revenues don’t dip nearly as dramatically as other entertainment choices during bad economic times. The theory goes that people need diversions when times get tough, and other things get cut before the devoted gambler cuts his gambling budget.
   
But let’s step back for a moment and determine just what a recession is. Most economists define it as a period of general economic decline—specifically, a decline in gross domestic product for two or more consecutive quarters.
   
The problem is, however, that you don’t know you’ve been in a recession until you are deep into it or even out of it. The downturn in the early ’90s, particularly in the northeastern U.S., was quite severe, but we didn’t really understand how severe until the government compiled all the data that goes into determining whether we were actually in a recession. And then looking back on that time, we could see quite clearly that the economy took a severe hit that was reflected in all sectors, but it didn’t look as bad in the casino sector—which, at that time in the Northeast, was only Atlantic City.
   
But for those of us who worked primarily in Atlantic City in those days, we can tell you that it was a difficult time for everyone. The casinos were engulfed in what was probably the most competitive environment I have ever witnessed. Because Atlantic City in those days was primarily a bus market, the competition was brutal for that segment. Not only would customers get what was essentially free rides to the casinos, but they got “coin” when they arrived, “bounce-back” coupons for the next time they got a free ride, and an unbelievably high level of “cashback” for whatever coins they did slide into the machines.
  
 Those giveaways only heightened the pressure to keep up the “gross gaming win,” which was the only criterion that most analysts considered in those days. So the recession seemed to have bypassed Atlantic City when you looked at those impressive figures.
   
Fast forward to 2007. While most economists agree that it did not rise (or sink) to an “official” recession, the economy was clearly hurting, led by the real estate sector. The collapse of the housing market in most areas of the U.S. has caused homeowners to reconsider how they spend their money. The nest egg (the primary residence) of many people has taken a hit. One of the worst areas for declining home values has been Las Vegas. The value of residential real estate plummeted 20 percent and more in ’07. Even the value of commercial real estate (except for, possibly, the Las Vegas Strip) was down. But gaming did not decline, supporting the theory of a recession-proof gaming industry.
   
But back in Atlantic City, gaming took a hit in ’07. It was the first year since gaming was established in 1978 that gross gaming revenues did not increase over the previous year. Certainly, Atlantic City was impacted by slot parlors and racinos in Pennsylvania, which debuted in full force in 2007.
   
Another area of the U.S. hit hard economically has again been the Northeast. Would Atlantic City have had as difficult an economic year absent competition from Pennsylvania? I believe it would have, and for proof, just look at Connecticut.
   
In the last six months of 2007, the slot revenues (the only numbers those casinos are required to report) at Foxwoods and Mohegan Sun declined anywhere from 2 percent to 5 percent each month. There is no additional competition for Connecticut, unless you count a rather ineffective slot operation in Yonkers, New York.
   
It’s my contention that a weak economy has hampered revenues throughout the Northeast, and that includes racinos in New York state and Pennsylvania.
   
I believe that casinos are not at all recession-proof, and maybe not even recession-resistant. Each jurisdiction has its own dynamics but it appears that the most vulnerable gaming enterprises to economic downturns are the “locals” casinos that you find outside of Las Vegas. (Remember, Atlantic City is probably the biggest “locals” market in the industry, drawing most of its business from drive-in customers within three hours of the Boardwalk.) Las Vegas only has to worry about travel disruptions, like those that occurred post-9/11.
   
So for those who expect casinos to skate through any economic downturn or even a recession, take stock in who comes to your casino, and how they are affected by bad economic times. And please don’t make the mistake Atlantic City made in the 1990s and revert to death-march marketing strategies that only make the situation worse.