Gaming companies have historically made a huge proportion of their revenue from only a small proportion of their customer base. A senior casino executive who did not wish to be named once told us that “50 percent of the revenue comes from only 1 percent of the customers.” This huge skew, combined with a massive overall reduction in wealth (the Dow Jones Industrial Average, for example, has gone down 36 percent in one year), places the key revenue drivers of gaming business at risk in today’s economy (see Chart 1). We think winners in the gaming market are like the winners in the retail market: The operators that cater to the wider market will find growth opportunities in these difficult times. The Golden Gate Casino is a perfect example of this.
Defining the Recession
Everyone is familiar with the word “recession,” but some may not know that there are different ways in which the word is defined. For example, the Business Cycle Dating Committee (BCDC) of the National Bureau of Economic Research (NBER) defines recession as a “significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators,”1 whereas RecessionHistory.com defines it as a “decline in a country’s gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year.” The current recession, according to the BCDC, started in the United States in December 2007, and no one seems to know exactly when it will end.
The current recession in the United States has become global2 and has significantly affected Nevada’s economy (see Chart 2). According to Dr. Keith Schwer, director of the Center for Business and Research at UNLV, southern Nevada is in for its longest recession since the Great Depression. He holds the opinion that southern Nevada’s economy depends on economic conditions elsewhere—in other words, what happens in Washington, D.C., has an impact on what happens here. He expects this recession to continue through the rest of this year.
According to Richard Lee, vice president of First American Title Company, Las Vegas needs to return to what has worked in the past, namely, catering to the wider market. Previously, the opening of new hotel-casinos—Palazzo, Encore and M—created jobs and attracted visitors. When CityCenter, Cosmopolitan and Fontainebleau open, they should also bring new products to Las Vegas and revitalize the local economy.
“Meeting space works in Las Vegas,” Lee said. “What doesn’t work? Fifteen-dollar hamburgers, $200 steaks and $600 bottles of vodka.”3
How are Las Vegas Casinos Responding?
As recession sweeps the globe, Las Vegas casinos are trying to lure the customers back—local or not—by offering huge discounts on hotel rooms and buffets. They are also trying to increase membership in their loyalty programs by offering very attractive awards and free play. Hotel occupancy, normally at 90 percent, was all the way down to 72 percent in January 2009. Las Vegas casinos found that customers are no longer willing to pay premium prices for rooms, entertainment or food, and they quickly responded. Terrible’s Primm Valley Resort & Casino started to give away free hotel rooms so that the locals would come back and play slots, and the Excalibur offered a $25 ticket for its all-you-can-eat-during-a-24-hour-period buffet. Several off-Strip casinos have been offering 2-for-1 coupons for buffets and restaurants—Sunset Station, Orleans and Silverton, to name a few. Fast food is in, fine dining is out, and value is fashionable on the Strip.
The new strategy is to offer attractive bargains to lure customers back without spending too much. You can now buy a $95 package at the Imperial Palace that includes a hotel room for the night, all meals at the buffet and café, plus all drinks inside the casino and pool bars. Luxor and MGM Mirage also have all-day buffet tickets. The 3-star Joël Robuchon at the MGM Grand, touted as one of the 10 best French restaurants in the world and known for its $195–$385 per person six-course meals, recently debuted a more reasonable $89 per person menu option. In April alone, the Red Rock Hotel & Casino held a $3,500 blackjack tournament, a $15,000 frequent free play promotion to celebrate its three-year anniversary, a $90,000 VIP golf invitational, and two Sundown Parties at its Sand Pit Bar; in May, it continued with a Top 400 Appreciation party and a $50,000 slot tournament. The Renaissance Las Vegas Hotel is offering Nevada residents a Las Vegas vacation package that includes two nights in a deluxe room, a 20 percent discount at the steakhouse ENVY, two complimentary drinks at the ENVY lounge, and complimentary transportation to Turnberry Place, where they can use the Stirling Club Spa at a 20 percent discount. Package rates start at $109 and the offer is valid through Aug. 30, 2009.
In the words of Tom Xavier, general manager of the Renaissance Las Vegas Hotel: “Tough economic times call for informed decisions when it comes to getaways and vacations. Renaissance provides the most luxurious amenities in Las Vegas for the best value. A staycation at our property is a must for anyone looking to have a great getaway at a low price.”4
This collective strategy of Las Vegas casinos and hotels is working—occupancy increased to 85.9 percent in March4—but not without cost: The average room rate went down to $92, a 12 percent drop from January.
Local bars with 15 video poker machines have also been hit hard by the current recession, and many of these bars have come up with their own free play and match play offers. For example, Pug’s Pub near the Tropicana and Maryland Parkway intersection has a loyalty program of its own, and depending on their amount of play, customers are mailed a voucher in the range $20 to $250 every week. The friendly bartenders at Pug’s also mail out vouchers for “$20 in free play when you play $20” to loyal customers every week. Pug’s has replaced its old TVs with new large-screen LCD HD TVs to lure players in to watch NBA games or French Open tennis. It has also started weekend karaoke—and if you sing along with Gary, match play is increased from $20 to $25. While we hesitate to predict the outcomes of these marketing efforts, it is apparent that these operators are targeting the mass market.
Golden Gate’s Response
Golden Gate Hotel & Casino at 1 Fremont St. has an interesting history. The plot of land at 1 Fremont St. was purchased in 1905 for $1,750, and the then-Hotel Nevada opened in 1906, offering room and board for $1 per day. In 1907, the first telephone in Las Vegas was installed at 1 Fremont St.; its phone number was 1. When gambling was made illegal in Nevada in 1909, the roulette and poker tables were stored away. Gambling became legal again in 1931, and the name of the hotel was changed to Sal Sagev, which is Las Vegas spelled backwards. It became the Golden Gate in 1955, and in 1959, debuted its famous bargain-priced shrimp cocktail, which was voted “Best of Las Vegas” by locals year after year. The Fremont Street Experience was built in 1995, and since then the Golden Gate has been one of two “gates” to the largest open air screen in the world.5
To find out how this historic casino has responded to this recession, we met with Rich Lehman, Golden Gate’s vice president of gaming, over lunch at Golden Gate’s café. Our conversation started with Lehman telling us about Jack Binion’s first direct free play system about 15 or 20 years ago, in which Jack Binion himself walked through his casino hall with a wheelbarrow full of quarters to give away to players. Things are a little different now. The wheelbarrow is gone, replaced by electronics, and Golden Gate loyal players are awarded bonus rounds and points through PIN-protected customer loyalty cards.
Players also get scratch cards and coupons, plus free rooms at the Golden Gate Hotel & Casino. Lehman uses a computer program that takes in to account drop, average bet size, game speed and hold percent of a slot game to calculate the expected number of games a player will play, generated coin-in and points earned. In one scenario, each $5 scratch card extends player’s time on device (TOD) by nine minutes. Comps are earned at a rate of 10 percent of theoretical win when a scratch card promotion is in effect.
According to Lehman, one thing that separates the Golden Gate from other larger casinos is the personal touch that the management and staff offer all of its customers. We can vouch for that—the service at the café was truly exceptional. The waitress kept coming back to fill our coffee mugs and water glass, and kept asking us if we needed anything.
According to Lehman, the Golden Gate is above the Freemont Street average by 25 percent, and it is apparent that the focus on the mass market and offering real gaming-related incentives has produced results for this historic property.
Recession and Business Analytics
Many chain retailers cluster stores and use sophisticated forecasting models in order to customize inventory for the clusters or groupings and also to improve marketing. Clustering, in these cases, is a division of the entire list of stores into groups of stores such that (1) stores within one cluster are similar to each other, and (2) stores in two different clusters are quite different. Casinos with loyalty card programs can also use customer segmentation methods to better understand their customers and increase membership.
An alternative approach to casino customer segmentation is to determine what motivates customers to visit a casino and gamble. Such a study was undertaken by Choong-Ki Lee, et al., in 2006.6 Lee and his colleagues segmented the Korean gambling market using the multivariate statistical methods of factor analysis and cluster analysis on a sample of Korean gamblers, and then explored socio-demographic and behavioral differences between various segments. Their factor analysis delineated a total of four dimensions of gambling motivations: (1) socialization/learning, (2) challenge, (3) escape, and (4) winning. The cluster analysis resulted in four clusters: (1) challenge/winning seekers, (2) only winning seekers, (3) light gambling seekers, and (4) multi-purpose seekers. Descriptive statistics of casino gamblers’ socio-economic characteristics and behavioral variables were calculated for each of the four clusters.
Some of the findings of this study were that the “light” gambling seekers tended to stay for shorter durations relative to the other cluster segments; the “challenge/winning” seekers and “only winning” seekers tended to be alone, whereas the “light” gambling seekers and “multi-purpose” seekers came with family and friends; the “challenge/winning” seekers preferred blackjack and not the slot machines, whereas the “multi-purpose” seekers preference was for slot machines and table games; and the “light” gambling seekers liked roulette and baccarat most, whereas the “only winning” seekers preferred blackjack and baccarat.
Segmenting Las Vegas casino visitors based on gambling motivation can provide very useful information to casino managers toward identifying effective promotional and business strategies.
Intimacy in the Larger Enterprise
The results from the Golden Gate show that the right level of bonus offerings accompanied by matching service can, even in today’s recession, enable growth. The challenge to the larger operator is how to deliver the same kind of customer intimacy to a larger and more varied patron base. Our approach to this is to segment customers based on both spending and product behavior. This segmentation builds on the work by Lee, et. al., and builds finer segmentation of both gaming behavior and current status. For example, we can model the expected value of the customer and when the customer is “past due.” This work is then expanded into a “past due” activation program, which models and tests the effectiveness of various reward levels to re-activate the “past due” customers.
The gaming industry has been shielded from recession in the past, with only minor deviations from a seemly unstoppable growth. Today’s recession is different in that it has challenged the industry to look beyond the traditional methods of growth. There is no doubt that well-delivered intimacy can deliver growth in the right customer segments, but the challenge now is how to apply these methods to a much more diverse customer base. We will explore the math of how to model “past due” customers in a follow-up article.
5 www.goldengatecasino.com/history.html Lee, Choong-Ki, Lee, Yong-Ki, Bernhard, Bo.
6 Jason, Yoon, Yoo-Shik (2006). Segmenting casino gamblers by motivation: A cluster analysis of Korean gamblers. Tourism Management, Vol. 27, pp. 856–866.