PWC’s Global Gaming Industry Outlook to 2014

The world wants to celebrate the purported upcoming second anniversary of the end of the Great Recession, and no industry more than gaming wants to have a reason to celebrate. Gaming revenue, however, is driven by consumer spending behaviors that depend upon disposable income to survive and thrive. Even with the wide array of non-gaming amenities offered by commercial and tribal casinos that have become substantial revenue-generating components of casino resorts, the gaming industry has been hard hit by the economic downturn. To better understand where the future of the gaming industry resides, in this article we will briefly explore historical gaming revenue results from 2005 to 2009, focus our attention on casino gaming estimates for 2010, our forecast upward through 2014, as well as the drivers behind the 2010-14 estimated 9.3 percent compound annual growth rate (CAGR). The basis for this forecast is PwC’s Playing to win: The outlook for the global casino and online gaming market to 2014.

Global Overview
The Great Recession started in December 2007 and lasted 18 months. It was the most prolonged recession since World War II. According to the National Bureau of Economic Research (NBER), the recession ended in the summer of 2009, but the gaming industry continues to feel its lasting effects. Looking back at 2005, when global gaming revenues were $86.6 billion, the next two years revealed strong single-digit growth and reported increases of 8.4 percent in 2006, bringing total revenues to $93.8 billion, and 7.7 percent in 2007 reaching $101.1 billion in revenues. The following two years presented revenue results that most gaming industry veterans had never experienced before, and many never expected to see. In 2008, global gaming revenues were only 2.3 percent higher than 2007 at $103.4 billion due to declines in the U.S. and EMEA markets (Europe, Middle East and Africa) of 1.6 percent and 2.9 percent, respectively. Global 2009 results were 2.8 percent lower than 2008, with the U.S. down 3.4 percent, EMEA down 12.2 percent, and Canada reporting declines of 1.4 percent (see Figure 1).

Figure 1

In 2010, global gaming revenues are estimated to be up 8.8 percent overall over 2009 at $109.4 billion, due to the 47.9 percent increase in the Asia-Pacific region, specifically Macau and Singapore. The global increase masks the third consecutive year of declines in the U.S. and EMEA markets of 1.3 percent and 6.2 percent, respectively. The global gaming landscape has and will continue to change through 2014, as the U.S. contribution to total global gaming revenues, which was 61.1 percent in 2005, and 57 percent in 2009, decreases to 43.6 percent in 2014. The Asia-Pacific region will narrow the gap from a 48.5 percentage point difference in 2005 to a 3.5 percentage point difference in 2014 (see Figures 2, 3 and 4). This dramatic shift includes the expansive growth that was seen in 2010 with the new resort openings in Singapore, including the $4.4 billion Resorts World Sentosa, and the $5.5 billion Marina Bay Sands, and will be seen in other key regions including Macau due to the 2011 openings of Las Vegas Sands parcels five and six, and the new Galaxy Macau resort, and in the Philippines with the expected completion of the $15 billion Manila Bay resort in 2013, among others.

Figure 2

Figure 4Figure 4Among the five regions that are expected to generate $156.8 billion in global gaming revenues in 2014, United States, EMEA, Asia-Pacific, Latin America and Canada, the fastest growing region will be Asia-Pacific with a 23.6 percent CAGR. Latin America, while starting at a modest base of $425 million in 2009, is the next fastest growing region and is expected to grow at a 12.8 percent CAGR through 2014. When considering revenues instead of growth rates, the United States is expected to continue its No. 1 spot through 2014, returning $68.3 million in gaming revenues, followed by Asia-Pacific with $62.9 billion, EMEA with $19.7 billion, Canada with $5.1 billion, and finally Latin America with $776 million.

United States
Total casino gaming revenue in the United States is expected to grow at a 3.6 percent CAGR during the forecast period, from $57.2 billion in 2009 to $68.3 billion in 2014. This growth represents an increase in gaming spending of $11.1 billion, or 19.3 percent. Improved economic conditions will trigger a recovery in late 2011, but U.S. gaming revenues are not forecast to return to 2007 levels until 2012, when $60.5 million in gaming revenues are expected (see Figure 5).
Figure 5
Percentage contribution rates by segment in the U.S. will realign slightly through 2014 as the expansion among regional casinos will continue. In 2005, Nevada contributed 22 percent of total U.S. casino gaming revenues, but dropped to 17.9 percent in 2009 due to the recession-based shift by consumers away from overnight air travel to destination resorts. Nevada is expected to contribute 18.3 percent of total U.S. gaming revenues in 2014, as regional casinos continue to cut into both Atlantic City and some tribal casino revenues, thereby diluting their proportion of gaming revenue contribution (see Figure 6).

Figure 6The impact of the economic downturn first became evident in the U.S. gaming industry in 2007 as the U.S. housing crisis contributed to a drop in domestic travel, which resulted in fewer visitors, lower trip frequency and smaller wallets. Casino projects were put on hold, resorts dropped room rates, and non-gaming revenues took a beating as three consecutive years of gaming revenue decreases resulted. Nevada was hard hit from the recession, but it will continue to be the largest single casino gaming state in the U.S., generating casino spending of $10 billion in 2010, increasing $2.6 billion or 25.6 percent, by 2014 to $12.5 billion. Las Vegas has prepared for a long-term, gradual recovery, as experience shows that disposable income spend on gaming activities tends to lag 12 to 18 months behind a broader economic recovery.

Tribal casinos, which have provided the greatest proportion of gaming revenues to total revenues during the entire study period, will continue in the No. 1 spot generating an estimated $26 billion in 2010, increasing to $30.3 billion in 2014. We expect an additional decline of 1.9 percent in tribal casino revenues in 2010, and a slight increase of 1.5 percent by 2011 year-end to $26.4 billion. We do not expect tribal casinos to return to the double-digit increases that characterized the first half of the decade, as this market segment will no longer be boosted by the significant numbers of new casinos seen in the late 1990s and early part of this decade. Additionally, tribal casinos will feel the impact of regional casino openings and will need to keep current on gaming products as competitive pressure is exerted.

Regional casinos, supported by expansion and openings in racetrack casinos and reinvestment and development in riverboat and land-based casinos, will continue to redirect revenues away from Atlantic City and some tribal casinos. Regional casinos are expected to report $17 billion in casino gaming revenues in 2010, growing at the fastest U.S. CAGR of 6.1 percent, resulting in 2014 revenues of $22.2 billion. The investment in new facilities and current product themes and games will continue to attract rising visitor numbers and revenues. Table games in Pennsylvania and Delaware, and new properties in Indiana, New York and Maryland will support increasing revenues for regional casinos going forward.

Atlantic City, while still the second largest U.S. casino gaming destination, has come upon challenging times. This market will end 2010 with gaming revenues 10 percent lower than the prior year, marking the fourth consecutive year of declines, with another two years of declines still expected. Revenues were down 13.2 percent in 2009, meaning that they have declined by a cumulative 24.4 percent from 2006 to 2009. We expect 2010 revenues to be $3.6 billion, and do not expect revenues to grow again until 2013. In 2014, gaming revenues will still be well below their 2006 peak. Prior to the recession, Atlantic City was in much need of capital reinvestment to keep pace with proposed developments in proximate states. But as the recession gained momentum, operators struggled to raise capital, ownership changed hands, and the facelift that was to be, never happened. We do not expect Atlantic City to recover the ground it has lost over the past four years and are projecting a 3.2 percent compound annual decline, from $3.9 billion in 2009 to $3.4 billion in 2014.

EMEA
The slowest growing region among any of the sectors is projected to be EMEA, which received the sharpest blow from consumers during the worldwide recession. From 2007 to 2008, EMEA gaming revenues dropped 2.9 percent, then another 12.2 percent in 2009. We project that EMEA will end 2010 with a third straight year of declines, or 6.2 percent lower than 2009, translating into $16.2 billion in revenues in 2010. The late 2011 recovery will bring some relief to the region where we expect a 1.6 percent increase. Even as gaming revenues continue on their upward accent, we do not expect them to match the 2007 peak during this observation period that extends through 2014 (see Figure 7).

Figure 7The dominant contributor to gaming revenues in EMEA is Western Europe, where 79 percent of gaming revenues will originate in 2010. Western Europe 2010 results will decline 2.6 percent from 2009, reporting total gaming revenues of $12.8 billion. The largest single market in this segment is France, where $4 billion in revenues were reported in 2009, followed by Germany and the United Kingdom, with $2.1 billion and $1.2 billion, respectively. Every country in the Western Europe segment will report declines in 2010, ranging from the low single digits to as high as 15.2 percent in Greece. We expect 2010-14 CAGR for this region to be 2.7 percent, bringing 2014 revenues to $15 billion, up $2.2 billion from 2010. The United Kingdom will contribute to this growth from general improvements in the overall economic environment, but also from the 16 new large casinos scheduled to open in new U.K. markets.

The Central and Eastern Europe region includes the Czech Republic, Hungary, Poland, Romania, Russia and Turkey, and will contribute 10.8 percent of total EMEA revenues, or $1.7 billion in 2010. There is no commercial gaming currently in Turkey or Romania, and very limited in the Czech Republic, and in 2006, Russia enacted a law to limit casino activity to four zones by 2009 in the Krasnodar, Rostov, Kaliningrad and Siberia regions. When the then-existing Russian casinos closed in 2009, new casinos had not yet opened in the four zones, and casino revenues dropped to zero. While new casinos began opening in 2010, revenue results were still very low as none of the new properties were located in or near major population centers. The significant decline in Russian gaming revenue from the zone announcement in 2006 through 2009 resulted in a 79.4 percent drop representing $3.6 billion in lower gaming revenue.

The Middle East/Africa region of EMEA is driven by the gaming conducted in South Africa where 10.2 percent of total EMEA 2010 gaming revenue originates. Revenues in 2009 were 2.8 percent higher than 2008, and 2010 will end 3 percent over 2009 at $1.7 billion. South Africa is one of nine regions that did not report gaming revenue declines leading up to, during, or post the recession. These geographic areas also include: U.S. regional casinos, all Latin America casinos, Portugal, Australia, Macau, Malaysia, South Korea and Vietnam (areas that began operations in 2009 and 2010 are not included in this list, such as Singapore).

Asia-Pacific
The Asia-Pacific region includes 15 gaming destinations that will generate 29.5 percent of global gaming revenue in 2010, or $32.3 billion. It is the fastest growing casino revenue region worldwide, and we expect a 23.6 percent CAGR through 2014. The four largest markets are Macau, Australia, Singapore and South Korea, with Macau’s revenues leading the group by an 8:1 margin (see Figure 8).

Figure 8

Macau surpassed Nevada in 2008 to become the world’s largest casino gaming area with revenues of $13.6 billion, and is expected to grow at a 24.7 percent CAGR through 2014 to reach $45.2 billion. Over the past five years, several major properties have opened in Macau, and between 2005 and 2008 revenues more than doubled. While the first part of 2009 was somewhat challenging due to the global economic conditions and new visa restrictions on visitors from the mainland, the second half of the year rebounded enough to post an annual 9.7 percent increase.

Australia will lose its second place position to Singapore as early as first quarter 2011, as Australia faces heightened competition for its high-rollers from new Asian properties. Australia is expected to grow at a 3.2 percent CAGR through 2014, the slowest growth rate in the Asia-Pacific region, reaching $3.2 billion by 2014.

While Singapore takes the third spot in gaming revenue generation in 2010, reporting an estimated $2.8 billion, revenues will nearly double in 2011, due to the $9.9 billion investment in new casino resort projects opening, making Singapore the region’s second highest revenue generator. Full-year results in 2011 will include gaming revenue increases of 99.2 percent over 2010, resulting in $5.5 billion of revenues. Singapore will report a 2011-14 CAGR of 31.9 percent, nearly mirroring Macau’s percentage growth trajectory.

South Korea generated $2.4 billion in gaming revenues in 2009, growing 3.3 percent over 2008. Jeju Island was awarded Free International City status—the same status as in Singapore and Hong Kong—and plans to convert the area to a casino center, which will boost future revenues. A new gaming project is expected in 2012 and we project increases during the next five years. We expect South Korea to report a 7 percent CAGR from 2010 to 2014.

Latin America and Canada   
Among all of the regions observed, Latin America has the smallest casino gaming market. The region includes six countries and generated $425 million in gaming revenues in 2009. New casinos in Chile from 2006 to 2008 grew revenues 25.1 percent by 2009, and the three casino openings in 2010 will lead to increases of 39.7 percent over 2009. Overall, the Latin America region is expected to grow to $776 million in 2014, representing a 12.8 percent CAGR (see Figure 9).

Figure 9

Canada generated $3.8 billion in casino revenues in 2010, representing 3.5 percent of global gaming revenues. Although gaming revenues grew during the first part of the global recession, 2009 ended 1.4 lower than the prior year. The Canadian market is expected to recover from this recessionary impact in 2010, and will report 2010 revenues 3.3 percent higher than 2009—marking a quicker recovery than the U.S., which is not expected to begin recovery until late 2011. New major casino openings in 2013 will support a 6.7 percent CAGR through 2014 resulting in $5.1 billion in casino gaming revenues (see Figure 10).

Figure 10
Conclusion
Once touted as a recession-proof entertainment option, casino gaming has taken its blows over the last several years. Looking at the raw numbers, we see an industry that is not impervious to the ebbs and flows of the global economy, but one that functions as a microcosm of such, reacting and moving to the changes in customer spending behaviors and abilities. Given that gaming is not a life necessity (although some may argue otherwise), spending on this form of entertainment is dependent upon disposable income that is readily available and easily accessed. Prior to the recession, the U.S. gaming industry benefitted from consumer confidence in the housing industry where tapping into ones home equity nest egg for a gaming destination vacation was possible and acceptable. Excess income was more easily diverted to the “fun, food and entertainment” envelope found in many household budgets, when unemployment was just 4.9 percent nationwide. International tourists that once flocked to the U.S. for an all-encompassing gaming experience that could only be realized in the top casino-destination location in the world, Las Vegas, were given a reason to stay home and abroad, and open their wallets at one of the then-emerging Asian gaming centers.

Casinos will continue to change hands as companies look to off-load low performing assets and seek additional restructuring opportunities to recover from the high debt-loads associated with the recent construction boom. These efforts will be necessary to fund reinvestment initiatives in areas such as property renovations and product replacement, to keep pace not only with competitive gaming offerings, but to reinvigorate a gaming clientele that is being lured daily by an explosion of alternative entertainment choices.
Technology will clearly need to be a resounding factor in the gaming industry scheme to keep current and develop casino products that entice and address consumer preferences, which are evolving at a rapid clip. The gaming delivery model itself has already begun its metamorphosis as hand-held wagering devices and mobile technology have crept into the consumer lexicon and expectations of state-of-the-art gaming experiences are addressed.

To know the gaming industry is to know that, even as imperfect as many a naysayer would like to lament that it is, it is nonetheless resilient. While there are many hurdles that still must be overcome to clear the road ahead, a road that over the next 12 to 18 months will continue to be laden with bumps and ditches, it will nevertheless be cleared. The result will likely be an industry that looks very much like it does today, comprised of large and prestigious casino-resorts managed by Fortune 1000 and other successful private operators. There will be many lessons learned from the Great Recession that will be carried over to the future and function as reminders of best practices in efficiency, and while some will surely be worse for the wear, many that embrace the lessons, make the hard choices and adapt to the sweeping technology developments, will emerge on the right side of gaming’s long road ahead.

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