Looking for a model while flying blind By Ken Adams, CDC Gaming Reports December 13, 2020 at 7:00 pm Depending on where you mark the beginning, December is either the ninth, tenth, or eleventh month since the COVID-19 coronavirus hit both the world economy and the gaming industry. As the experts predicted, we are now enveloped in a second wave of infections. This wave is worse than the first, and there is no immediate end in sight, although given that a pair of vaccines have recently been approved, there is more hope now than there was a month ago. 2020 is winding down; in a couple of weeks, we will enter a new year. Vaccines or not, however, predicting the end of the crisis and return to a more normal economy is not easy at this point. The Las Vegas Strip Wednesday morning, June 4. It is particularly difficult now because there is a second wave of restrictions to go along with the second wave of infections. The governor of Nevada has reduced the capacity of casinos from 50 percent to 25 percent. In Michigan, Illinois, Rhode Island, and, most recently, Pennsylvania, casinos are closed again. The length of the closures varies, but Pennsylvania’s casinos, for example, will be closed through the Christmas-New Year’s week. As the number of COVID cases increases, other states may follow suit. The current crisis will peak, probably within the next month, and a downward trend in new infections, coupled with the coming of the new year, will likely lead to a plethora of attempts at predicting the course of the recovery. But there are no exact models for gaming. The closest we have is probably Macau, and Macau is a flawed model. It is a part of China and governed by authorities and conditions quite unlike those in this country. Even more important, it is the rough equivalent of a regional market in the United States, but, instead of a population of a few hundred thousand or, at best, a few million, Macau draws from mainland China and its population of 1.6 billion people. As much as it is a flawed model, though, it is at the same time a nearly perfect model. Macau is totally dependent on China. Because of its single market source, it is possible to isolate variables and analyze the impact of each separately. One of the variables that is easy to isolate and analyze is restricted capacity. Macau has had a series of capacity limit restrictions that were gradually relaxed as the infection rate in Macau and China declined. The increase in capacity does not appear to have had any impact on revenue; here, the limited capacity has acted as a constraint on gaming activity. The Chinese economy has more or less recovered and is even showing signs of year-over-year growth. People in China are spending money; they’re just not going to Macau to do it. The only variable that appears to be significant is the total number of visitors to Macau. Visitation declines match revenue declines, ranging from a 90 percent dropoff in the early spring and summer to a slightly more reasonable 70 percent in recent months. People in China are spending money and they are traveling, as well, but only for short distances. That may be the key to understanding the potential recovery trajectory in this country. The early results of the initial reopening of casinos in the United States this summer have been largely positive, although capacity restrictions, the loss of entertainment, food and alcohol options, and limited hours are understandably having a measurable impact. Local and loyal gamblers were eager to get back to regular casino visits, but jurisdictions that rely more heavily on tourists have not had the same bounce back. Casinos on the Strip in Las Vegas and the Boardwalk in Atlantic City have fared less well than those in Ohio and Indiana, and VLTs in Illinois and South Dakota are breaking records. There was one telling bit of news recently that sheds some light on the issue. Pollstar, a trade publication for the concert industry, published a report saying that live entertainment events had lost $30 billion during the pandemic. Clearly, the cause is the effective absence of those events, and the radically reduced capacity for the handful that are held. Both have implications for the recovery of casinos. Customers rely on casinos to provide a wide variety of entertainment options. Losing entertainment and dining has greatly reduced traffic to casinos. The other relevant national trend is air travel: passenger counts in 2020 are about one third of those in 2019, and earlier in the year the difference was even more pronounced. People are traveling less, and when they do travel, the distances and the length of the trips are shorter. For its part, Macau has yet to experience a significant return of Chinese visitors. China still has not allowed group travel, which was a major source of customers for Macau casinos. Visa and quarantine requirements have been reduced, but only recently, and high rollers appeared to have run for the hills; each month the percent of gaming revenue from VIP gamblers has decreased and the mass market segment increased. The general manager of a new casino in Brisbane, Australia said the property would not focus on Chinese high rollers. In his opinion, that market is gone. That might also prove to be a trend in this country: fewer gamblers in the top tier, more average gamblers. It is the trend in Macau and other Asian destinations, and on the Las Vegas Strip. The best model we have for predicting the next twelve months in gaming may not, in fact, be a gaming model at all. Travel and retail sales in the United States may prove to provide more relevant than gambling in Macau. On Black Friday 2020, in-store sales dropped 52 percent, but online sales increased 20 percent. Online sales went from 18 percent of total sales in 2019 to 36 percent of sales in 2020. Air travel was up dramatically from a month ago, as well, but down over 50 percent from a year ago. Automobile traffic into Las Vegas was down 20 percent from 2019. Gaming needs travel, in-store retail sales, and a return of public entertainment, which includes dining as well theaters, concerts, conventions, and sporting events, in order to have any chance of a full recovery. Regardless of the trends in travel, retail, and entertainment, gaming will experience significant on-paper growth beginning in March. Year-over-year comparisons will be easy for of those months when casinos were closed, and restrictions were at their most extreme. A better comparison will be between 2021 and 2019. A full recovery would be indicated by a return to the growth pattern of 2018 and 2019, not just growth over a very weak 2020. We can use the trends in other industries to predict trends in gaming and use the year before the pandemic as a more accurate measurement. Standing in the midst of an ongoing crisis and trying to predict the future, though? That’s a bit like flying blind.