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Leading U.S. gaming executives and consultants are becoming more concerned at rising inflation hitting revenues at casinos, although there is still hope that the impact of an economic recession can be avoided.
Economist James Klass is not forecasting a recession in the near term, but he is fearful that as the Federal Reserve tries to bring down inflation, the U.S. economy will tip into recession possibly by the middle of next year or into 2024, affecting a gaming industry still recovering from the coronavirus pandemic.
“We’ve got the inflationary pressure at least into next year but I think it should be easing,” Klass said. “If we don’t see inflation going from the 8-plus percent down to the 5 percent or 6 percent range by the fall or early winter, then I think we have more problems than we realize.”
Klass, a co-founder of Klass Robinson in Minneapolis, Minnesota, urged tribal casino operators last week during an hour-long webinar hosted by the Indian Gaming Association to monitor what happens with housing prices and other sectors of the economy that are most directly affected by interest rates and how it impacts consumer spending.
The Federal Reserve at its June meeting raised interest rates by 75 basis points, or 0.75 percentage points, the largest increase since 1994. The Fed’s move came shortly after data reported inflation at 8.6 percent year-on-year in May, the highest level in 41 years.
Analysts expect the Fed to raise rates to about 3.4 percent by the end of 2022, and then to between 3.5 percent and 3.75 percent in 2023. Currently, the Fed funds rate is between 1.50 percent and 1.75 percent.
Klass said credit card rates increase as fast as anything once interest rates start going up.
“So if you start to see come Christmas that there is not going to be as much spending, well that’s a cloud on the horizon that for 2023 and 2024, we might have more issues,” he said of the U.S. gaming industry.
But, Klass said, “if you don’t see that and you see what we are seeing now … people are still spending through the rest of the year then that’s a good sign for 2023 and there is a decent chance we can get to 2024 with inflation roped in to a more manageable level and without having to have any kind of really nasty economic downturn.”
Gene Johnson, executive vice president of Victor-Strategies, said he expects the current economic situation to continue for the near future, citing the need for the supply chain to unravel itself and employment, which is increasing, but people are still not flocking back to their jobs.
“There used to be a myth that the gaming industry was recession proof,” Johnson said. “That developed back when the industry consisted of two places, Atlantic City and Las Vegas, which were destination resorts. That was proven wrong during the last recession.”
U.S. tribal casinos took a nearly 19.5 percent revenue hit from the coronavirus pandemic when the industry recorded $27.8bn in gross gaming revenue for the fiscal year 2020. In fiscal year 2019, tribes reported $34.6bn in revenue, according to the National Indian Gaming Commission.
The American Gaming Association reported gaming revenues of $4.99bn in April, up 12.4 percent year-on-year and marking the second-highest grossing month of all time.
Both tribal and commercial casinos did see a decline in revenue during the Great Recession of 2009, despite generally strong growth over the past two decades apart from the pandemic.
“If you look at [commercial] gaming numbers, we are acting like Cassandra here,” Johnson said.
But Johnson noted that among the April figures, several states — namely South Dakota, Mississippi, Arkansas and Louisiana — posted revenue declines as some consumers have expressed concern over price increases and gas prices.
Both Jim Allen, CEO of Hard Rock International, and Derek Stevens, CEO of several downtown Las Vegas casinos and Circa Sports, expressed concern over inflation.
“There’s no doubt that in most regional gaming markets that customer is a day-tripper, utilizing gasoline to get to the facility. And when that’s up 30 percent to 40 percent, that’s going to be problematic,” Allen told CNBC.
Allen said the company’s plan to build a new resort in Las Vegas next to the Mirage, which it purchased in December for $1.07bn, was also being affected by inflation, along with its casinos nationwide.
“I was on record with CNBC back in April that I was a little worried about inflation,” Stevens told the Nevada Gaming Commission on Thursday (June 23) during a licensing hearing for Circa Sports. “Really since that time, we’ve started to see the impact of inflation on operations some more than others.”
For the last ten weeks, Stevens said, casinos have seen the impact of inflation on slot machines, table games and beverage revenues. He told the commission that his restaurant business has held up pretty well, and hotel reservations remain strong at his three properties in Nevada.
Stevens, along with his brother Greg, own and operate Circa, The D Casino, and Golden Gate Hotel and Casino in downtown Las Vegas. He said he has some concern as he reads his daily report that shows the number of daily ATM transactions, and the average withdrawal has declined.
“From the month of April to May, the average withdrawal amount was down the most I’ve ever seen in my career,” Stevens said. “It was down 11 percent. That’s a telling sign. We’ve seen a reduction in the general spend on the extra drink or the extra pull on a machine.”
Stevens said he was hopeful that the economic situation would turn around by the the fall.
Allen's and Stevens' comments contrast with those of CEOs of publicly traded gaming companies, who told analysts on recent first-quarter earnings calls that higher prices for gas and other commodities were not yet hurting customer demand.
