Monday, April 5, 2010

Casinos: Whither Circus Circus? The North Strip?

One upon a time, Circus Circus was MGM Mirage's most profitable casino. Ever since Jay Sarno was forced in the early 1970s to sell his then failing experiment to Bill Bennett, Circus Circus was transformed into a supreme moneymaking "grind joint" with low operating costs allowing the casino to make loads of money off low rollers.

However, this has changed. In less than two years, Circus Circus went from MGM Mirage's biggest moneymaker to its biggest money loser.

Circus Circus used to be fed by pedestrians coming up its way from the New Frontier, the Stardust and Westward Ho, but those resorts are gone. The detrimental effect has been considerable, MGM Mirage spokeswoman Yvette Monet says.

The next-door neighbors that Circus Circus has left are having more than their share of economic troubles, too. Financial figures aren’t available for the Sahara because it is privately held, but the property has been closing some of its rooms now and then to save operating costs. The Riviera reported a $5.6 million loss in the fourth quarter and is negotiating with creditors to restructure the company’s debt, which may include seeking bankruptcy protection.

For that same quarter, Circus Circus was MGM Mirage’s biggest money-loser on the Strip.

After expenses, the resort posted a loss of $3.4 million in operating income. It earned only $4 million in operating income for all of 2009, down from $33.7 million in 2008.

So why is this happening? Two reasons. First off, the recession forced the casinos into a "musical chairs price war" and downscale hotels/motels like Circus Circus have been left standing... Without a chair.

Circus Circus is a lower-rent property, and analysts and executives say budget properties are suffering as customers upgrade to well-appointed resorts that are offering deep discounts. If tourists can pay just a little bit more to stay at a more luxurious, newer hotel, they do it.

The industry has a name for this trend: price compression.

Think about it. Circus Circus regularly offers rooms for under $100 per night... But today, the same can be said of a number of more upscale Strip hotels. And for only $20-30 more per night, wouldn't you want to upgrade to, say, Luxor, Monte Carlo, or New York New York?

And speaking of that end of The Strip, that's the other reason why Circus Circus' fortunes have so suddenly changed. Much of The North Strip now consists of mothballed "skeletons" of former construction sites, so Circus Circus can't count on pedestrian traffic from nearby casinos like Excalibur can on The South Strip.

Excalibur is more centrally located on the Strip, with more walk-by traffic and proximity to higher-end hotels, and it posted operating income of $8.4 million in the fourth quarter. That’s within striking distance of the $8.9 million earned by neighboring Mandalay Bay, a much larger and more luxurious property that includes The Hotel, an upscale hotel expansion.

For 2009, Excalibur posted $48 million in operating income. That’s down from $84 million the prior year but was better than Monte Carlo, New York-New York and Luxor, which are more expensive properties with higher-end amenities.

Circus Circus and Excalibur earned vastly different amounts of a key profit indicator called EBITDA — earnings before interest, taxes, depreciation and amortization. By this measure, Excalibur earned $72.1 million against Circus Circus’ $27.1 million. Excalibur’s EBITDA fell 35 percent, which is more within the range suffered by other major casinos in the recession. Circus Circus’ EBITDA, however, fell by 52 percent.

Excalibur benefits from being "the low rent alternative" to Mandalay Bay, MGM Grand, and other nearby higher end MGM Mirage casinos. The same can't be said, however, of Circus Circus, since its next door neighbors are now... Well, nothing. The lot at the corner of Las Vegas Blvd. and Sahara Ave. is empty, and Echelon won't resume construction until 2012 at the earliest.

And obviously, it isn't just MGM Mirage feeling the pain with Circus Circus. Riviera and Sahara have also suffered from this curse of the mothballs, as Fontainebleau looks likely to remain a smoldering hot mess until Carl Icahn decides to finally finish it.

So in the coming weeks, months, and years, it will be interesting to see what happens on The North Strip, what was once "The Original Strip". Many of the casinos up there were once sturdy survivors... But will they be able to survive the rest of "The Great Recession"?

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