G2E: Financial experts talk potential recession and its impacts

October 12, 2023 5:48 PM

G2E: Financial experts talk potential recession and its impacts

Photo: CDC Gaming Reports
  • Buck Wargo, CDC Gaming Reports
October 12, 2023 5:48 PM
  • Buck Wargo, CDC Gaming Reports
  • United States

The gaming industry has been strong coming out of the pandemic. But as economists continue to raise the specter of recession and a potential slowdown in consumer spending, financial experts are concerned about how much casinos will be impacted. The verdict, according to a G2E panel, is “maybe not so much, especially if they’re in destinations like Las Vegas.”

The panel discussion, “How Does the Industry Keep up the Momentum of the Past Two Years?,” considered the gaming-industry’s business outlook.

“It’s been relatively resilient,” said David Peterson, a senior director with Fitch Ratings, who moderated the panel. “Spending is encouraging. Jobs are encouraging. Savings rates have come down. There’s a lot of talk about recession and the economic forecasts have punted that along. Maybe, in the first half of 2024, they were expecting some kind of a recession. At some point, the consumer is going to break, but what’s going to tilt into a recession and more important, how does a recession impact the gaming industry?”

Howard Wang, managing director at Ares Management, where he focuses on U.S. credit and is responsible for capital deployed in the gaming, lodging, leisure, and broadcasting sectors, said once things started reopening after the COVID shutdowns, consumers shifted from spending on goods to wanting to catch up on years of missing trips and canceling vacations.

“You saw a shift from goods to experiences and gaming was the benefactor of that,” Wang said. “Vegas and regional casinos’ cash flows surged even beyond 2019 levels. The last couple of years, gaming has been on a tear, but there are some signs that the consumer may start breaking.”

Wang pointed out that in retail spending, there’s been an impact on lower-end customers.

“You haven’t quite seen it in the gaming sectors just yet. The rated player is still coming. But some of the management teams might say the lower-end unrated customer is coming a lot less frequently or not at all, so we’re starting to see early signs,” Wang said. “While oil prices are rising, interest rates are still relatively high, and some patrons will be affected by student-loan payments renewing, some cautious sentiment is definitely out there, but for now, it seems gaming is doing quite well.”

Teddy Swigert of Santander Corporate & Investment Banking said gaming has been “remarkably resilient” in past periods of downturns, such as the Great Recession, but regional operators fared better than destination locales like Las Vegas, because customers didn’t have to travel far to the casino. That’s a concern going forward, he said.

Raf Mercado, a vice president in the investment-banking division at Goldman Sachs, said margins are healthy for a lot of companies and believes that it doesn’t matter whether it’s called a recession, because nothing will be deep.

“It’s not a recession in the traditional sense of what we saw during the pandemic or financial crisis. This is a much softer recession for a lot of what the gaming industry is well prepared for. I want to make sure when that R-word comes out that it’s not a sense of panic and that everyone is pretty well prepared for the next 12 to 18 months,” Mercado said.

According to Wang, Las Vegas is well positioned, after growing its amenities beyond gaming to become a bona fide sports destination.

“I was late to book my room here and thanks to the Raiders playing the Packers on Monday Night Football at Allegiant Stadium, the rates were outrageous. It’s because tens of thousands of people were watching the game live and many more filling the sportsbooks and that’s on a Monday night, which isn’t a busy night in Vegas.”

Wang said Las Vegas is still a compelling option for group or convention business compared to Chicago or Florida. Many groups pushed back conventions during COVID and are now coming back at higher rates with more attendees and that will benefit Las Vegas.

“With the new amenities, you can say to an organizer, ‘You can go to Orlando and a theme park or to Vegas and see a game and watch U2 at the Sphere. I live in Los Angeles and am biased because I come here all the time, but it’s an easy sell and the rates are competitive, if not cheaper than some of these other cities like Chicago or New York. There’s still plenty of growth on that side. The projects on the non-gaming side will help that.”

Mercado also cited the non-gaming revenue growth in Las Vegas over the last two decades, rendering the city less vulnerable to any economic slowdown.

“The F1 race is coming up next month and Super Bowl in February. The Sphere has opened, and convention centers are being built, and more casinos and food-and- beverage outlets are going up on the north end of the Strip,” Mercardo said. “There’s talk of Major League Baseball and Major League Soccer teams and the NBA could come to Vegas in the future. Vegas is being transformed away from gaming and I think that’s a good thing. The industry as a whole will benefit from that.”

Swigert agreed that it bodes well for the future. Younger generations are attracted to experiences and their increasing earning power will benefit resort destinations down the line.