Seven Year Switch: How Las Vegas Hospitality Has Changed

In looking back at the history of "Vegas Seven," it’s important to keep one eye on the city’s trajectory.

Pharaoh woke from a terrible dream. Seven beautiful, fat cows emerged from the river to graze. It was good to be the master of such bounty. Then seven hideous, skeletal cows rose up and devoured the sleek ones. The last thing he remembered before he opened his eyes with a groan was that the scrawny cows remained just as ugly.

Only Joseph was able to interpret this dream and another, similar one: seven good years would be followed by seven years of famine that would erase the happy memories. The downturn was inevitable; no crying or praying could prevent it. To survive, Pharaoh had to gather a fifth of the bounty year harvests and store them for the lean years. He appointed Joseph to oversee, setting into motion events that ended in reconciliation, Exodus and revelation at Sinai.

Don’t be afraid—this hasn’t turned into a soul-seeking tract. I only want to remind you how deep the idea of economic cycles runs in us. We understand that there will be good years and bad years, and that if we fail to plan ahead, the bad years will be tragic. If Biblical wisdom doesn’t do that for you, next time I’ll talk about Kondratiev waves.

All this is a way of saying that it isn’t so strange that, seven years ago, Las Vegas was in the midst of a few bad years. From 2008 to 2010, Las Vegas Strip casino income from gambling, rooms and food—which together made up nearly three-quarters of total resort revenue—fell. The 20 percent drop in gaming win and 24 percent fall in room revenues were unprecedented, as was the 5 percent fall in total visitation. Fewer people were coming to Las Vegas, and they were spending much, much less. In 2011, you could say the recession ended for Las Vegas tourism. Gaming win and room revenues started to rise again. But the boom years of Las Vegas never really returned. The hospitality industry has shifted mightily in the past seven years in ways that will dictate its future.

The most obvious change is that gambling is no longer the alpha and omega of Las Vegas. Yes, we’ve been told that for years, but the numbers don’t lie: Although falling for decades, the percentage of total Strip income derived from gambling has decreased even more since the recession; last year it reached 34 percent. At the same time, revenue from rooms, food and everything else resorts offer has grown.

If the past seven years have taught anyone anything, it’s that the future we imagine is rarely the one we make.

Last year, Strip resorts made about $800 million more from their hotel rooms than they did in 2007, the last good pre-recession year, but $600 million less from gambling. This explains why, since the recession’s end, we have seen numerous nongaming construction projects (The Linq and T-Mobile Arena are the most obvious) but relatively little new-casino space. In fact, the city’s gambling footprint has shrunk; the number of slot machines has decreased by 18 percent on the Strip and 21 percent Downtown, and tables have also decreased. Total casino win is down about 7 percent on the Strip and 11 percent Downtown since 2007, while total resort revenues have reached record highs.

So there was no recovery, but there has been evolution.

If the current trend continues, by 2019, rooms will make about as much money as the casino floor, in 2020 they will surpass it, and by 2023, Las Vegas Strip resorts will make about $2 billion more from their rooms than their gambling.

The reason why the next seven sleek years will be different from both our last lean time and the previous bounty years is that the nature of Las Vegas hospitality has changed. Each previous increase in both gaming and room income was preceded by new supply: more rooms and more casino space. The dramatic gain in room revenues this time, however, came despite a relatively flat supply. The total number of available guest rooms in Las Vegas has increased by a quarter of a percent since 2010. In those same years, room revenue grew by 55 percent.

Why this dramatic increase in room income? Partially, it’s effective marketing—people continued to visit Las Vegas in record numbers—but primarily, it’s a combination of an increase in room rates and the addition of much-maligned (but more frequently paid) resort fees. So it doesn’t matter that gambling win is still well below its 2007 high; people are leaving more money in Las Vegas.

What’s even more amazing is that this room-centric model is the second reboot of Las Vegas casino hospitality since 2008. Initially, Asian high-rollers were the future; a pipeline of them sustained casino revenues in the worst of the recession and likely kept a few major operators out of bankruptcy. Baccarat play, by 2013, accounted for more than 14 percent of all Nevada gaming win, nearly three times its historic levels.

Following the Chinese government’s anti-graft crackdown, however, the flow of high-roller dollars lessened. Since 2013, baccarat’s real and relative share of gaming win has declined; it is now less than 11 percent. This is when the switch to nongaming and rooms specifically took center stage. With nearly universal casino proliferation domestically, this trend had been ongoing since the 1990s, but it became a fact of life in the years after the Chinese bubble burst.

Still, too heavy a reliance on rising room rates, resort fees and other miscellaneous add-ons (paid parking springs first to mind) may have a price. Those who don’t like paying more for their rooms have always argued that, with limited budgets, visitors will simply spend less in other areas if they have to fork over an additional $30 resort fee. Last year’s numbers may bear this out. For while room revenues rose 8 percent, total resort income grew only 2 percent, and the beverage, retail and entertainment departments saw actual decreases. It may be that, just as Chinese high-rollers got Las Vegas through the recession but were not a viable long-term key to staying in the black, the era of good fee-ings may be merely transitional.

Because if the past seven years have taught anyone anything, it’s that the future we imagine is rarely the one we make.