Caught in a pincer between shrinking consumer discretionary dollars and a change in customers’ spending priorities, regional casinos are losing wallet share to competition for entertainment budgets. So contended Deutsche Bank analyst Carlo Santarelli in a research note published yesterday.
Santarelli described the current atmosphere in regional gaming as “challenging,” although not “overly surprising, considering the outsized growth the regional-gaming sector experienced over the 2021/2022 periods, given the stimulus influence and pent-up customer savings.” Catalysts for a change in the dynamic were, he said, difficult to spot.
Noting “more muted organic demand” for gambling, Santarelli turned his attention to casino marketing. He said that operators and markets were returning to the intense promotional environment of 2019, before COVID shook up the casino economy.
The analyst characterized the regional status quo as in a “malaise,” with revenues down 2.5 percent through April 2024, although still more than eight percent higher than in 2019. He compared this to the stability of last year, in which gross gaming revenues (GGR) were basically flat compared to 2022.
“Broadly, we think regional-gaming spend remains in the process of normalizing, off some higher-than-normal highs (2021/2022), with promotions buttressing a demand picture that is likely softer than headline GGR is portraying at this time,” Santarelli wrote.
In only two of 14 states surveyed was casino revenue higher in the first three months of this year than in the comparable period of 2023. And those two states, Colorado and Illinois, experienced major infusions of new gambling capacity in the last year. This resulted in an industry whose GGR is lagging 1.3 percent behind 2023 and 18.8 percent below 2019.
Santarelli painted a picture of casinos in which visitation has flattened and as much as 20 percent of customers haven’t come back from before the 2020 pandemic.
“Recall,” Santarelli said of the defectors, “many of these patrons were low-value visitors, who came for amenities (buffets) and or for promotions, which they’re no longer receiving.”
Casinos’ saving grace, he continued, has been increased spending by customers who have remained loyal. Looking at Illinois, Iowa, Louisiana, and Missouri, Santarelli’s team chronicled spend per visit of $99 apiece, a 33.4 percent improvement over early 2019. This, he resumed, was more powerful for operating and profit margins than sheer visitation. Consequently, it hasn’t only powered increases in net revenue, but created sustained margin strength.
However, Santarelli advised to keep a watch on visitation numbers as they start leveling off. He cautioned that “a softening in spend per visit, on already depressed, though formerly heavily incentivized, visitation, has no real offsets … from a cost perspective.”
Santarelli then crunched numbers from the Bureau of Economic Analysis. He warned that the numbers conflate brick-and-mortar casino spending with that expended on igaming. “Casinos are actually seeing a smaller portion of the wallet share than the data articulates. … Thus, the decline in wallet share for regional casinos is likely greater than the data would indicate.”
Santarelli saw inflation as the primary contributor to this shift. He noted that casinos’ competitors had greater elasticity of pricing for such things as admission tickets, membership fees, and sticker prices on big-ticket items.
By comparison, “The casino industry, on the gaming floor, is largely beholden to raising hold percentages on slot machines, adding side bets to table games, or changing table-game rules in an effort to take price. These strategies work, to the extent customers seek time on device, more so than whatever time their budget buys them.”
Spending on casino gambling has gone from $116 billion in 2019 (when it represented 8.4 percent of the consumer dollar) to incrementally more in 2021, then downward each succeeding year. In 2023, casinos’ wallet share had fallen to 7.7 percent, then 7.4 percent early this year.
Once dining was backed out of the data, the picture grew more volatile, Santarelli contended. Casino spending then constituted 19.4 percent of the recreational dollar in 2019, 21.8 percent in 2021, and 18.8 percent in the first quarter of this year.
Although gambling’s performance in that quarter was almost 22 percent better than in the comparable period of 2019, its wallet share was only stronger than that of cable TV and movie theaters. It was a similar saga for late 2023.
“In short, we believe these trends speak heavily to the inflation dynamic noted above,” Santarelli summarized. “Casinos have limited pricing power, whereas many of the other recreational-oriented industries are able to adjust pricing to suit demand in an inflationary environment, such as the present and recent past.”
