Boyd and Caesars discussed their business strategies with analysts recently. The message was the same in both cases: the pandemic is winding down, but Boyd, Caesars, and most other gaming companies are trying to maintain the margins they achieved during the pandemic. It has been two years since the world went into lockdown over COVID-19. The gaming industry in the United States followed the mandates of state governors and closed the doors of their casinos. The lockdown lasted between two and six months, depending on the jurisdiction. The casinos reopened with heavy restrictions requiring masks, social distancing, and limited capacity. They also opened with angst and uncertainty.
No casino owner knew what to expect. The customers might come back or they might not; they might spend freely or nurse every dollar down to the last penny. The virus might return and force more closures. The restrictions might become semi-permanent in a climate of fear and distrust.
Analysts and operators tried to model recovery. The estimates ranged from a few months to a year, two, or even three years. That is not the way it played out, but it could have: Macau is entering its third year and recovery seems just as far away as it did in June 2020. The casinos in Macau reported $459 million in GGR in March. That is down 52 percent from 2021, but more tellingly it is down 85 percent from 2019, the year before the pandemic. And possibly more revealing, it is 42 percent less than Clark County (Las Vegas) reported in February 2022.
In the United States, something very different happened. From the first days casinos reopened, business was good. It was better than good; it was record breaking. That was a trend that continued through 2021. Total gaming revenue for 2021 was $52.9 billion, 73 percent more than 2020 and 18 percent more than the previous record year, 2019. The record level of revenue came from fewer customers, but across board casino customers on average spent more than they previously had. That created a secondary benefit for casino operators: better margins. The margins improved because the casinos needed fewer employees due to the reduction in the number of players.
The margins also improved because, in general, casino operators spent less on marketing and advertising. The pandemic created another phenomenon: a reduction in product. When casinos started to reopen, they examined everything closely. Most operators decided they had too many slot machines; they were too liberal with complimentary drinks, food, and rooms; and they did not need as many restaurants. In particular, buffets were the target of expense cuts. In the first place, it was challenging to operate a buffet while maintaining the restrictions required because of COVID. And then, most buffets cost more to operate than they generated in revenue and thus they became an endangered species. Much has been a written about the demise of buffets. Buffets gained fame and popularity 50 years ago in Nevada. It was a cheap way to attract large numbers of would-be gamblers. A buffet became as essential to a casino as slot machines and table games: it feeds the customers, and the customers feed the casino.
Over the years, it became increasingly more expensive to have a buffet, but it was a sacred cow. A casino wasn’t a casino without a buffet, was it? The pandemic allowed casinos to take their sacred cows out of the pens and examine them. Advertising, marketing, and comps were put under the same microscope. They did not go the way of the dodo or the buffet, but most casino companies gave these three categories a haircut. In the overall analysis, payroll also got a new look. It became common practice to reexamine staffing requirements. What happens when you cut out losing services, improve the efficiency of the casino floor with fewer slots and table games, cut back on marketing and advertising costs, and reduce payroll? The answer is more profit.
There are risks with that approach. Marketing and advertising bring customers in the door. A buffet or something like it could in the long term be essential to success. Cutting back on free drinks, food, and rooms might drive customers into the arms of the competition, and if the staffing levels are too low customers could find another casino where service is faster, better, and friendlier. Finding the right balance between expenses and revenue is tricky. But for publicly traded gaming companies maintaining the higher pandemic margins is critical; Wall Street has grown to expect and demand it.
Caesars and Boyd are trying to walk a fine line. They are not alone. Most gaming companies in one way or another experienced an improvement in bottom-line results due to the changed conditions in the aftermath of the virus. Conditions are still changing, particularly in the labor market. Payroll expenses are going up even without returning to previous staffing levels. Wages have increased. One of the outcomes of COVID is a labor shortage; the U.S. unemployment rate in March 2022 was 3.6 percent, with 11 million unfilled jobs. Across the economy companies are competing for workers, driving up wages and benefits. Additionally, competitive pressures are increasing as some operators return to pre-pandemic spending on payroll, marketing, and advertising.
Wall Street expects casino companies to produce the same margins they did in 2021. But 2022 is going to be a very different year. There is a war in Europe and there is inflation at home. With the full return of concerts, sporting events, conventions, theaters, and dining-out there is more competition for discretionary spending. And because of inflation there are fewer discretionary dollars available. During 2020, every company got a chance to reevaluate its business model and each had an opportunity to spend less and generate more revenue. The trick in 2022 will be to take those lessons and use them in strategic thinking. It will not be easy to match 2021, not in revenue and not in profit.