The Economics of Casinos

If the House Always Wins, Why Are So Many Casinos Closing?

The Economics of Casinos
December 12, 2014

Casino gambling has been legalized in many areas of the US in recent years, but two cities bear names synonymous with casinos: Las Vegas and Atlantic City. Yet so far this year, four of the latter city’s twelve casinos have closed their doors, and The Trump Taj Mahal may soon follow. What are the odds on that?

The casino closings started with the Atlantic Club Hotel Casino in January. Then late this summer, three more Atlantic City casinos closed in the span of less than three weeks: the Showboat Atlantic City Casino on August 31, the Revel Casino Hotel on September 2, and the Trump Plaza Hotel and Casino on September 16, thirty years after it first opened. In fact, “the Donald” even sued earlier this year to have his name removed from the Trump Plaza to minimize further harm to his name and brand.

The four closings put more than 8,000 casino employees out of work — one-quarter of Atlantic City’s total casino workforce — and many in the city are worried about the effect on tourism of having five giant, shuttered casinos right in the heart of the iconic Atlantic City boardwalk. If The Trump Taj Mahal follows, it will only add to the pain.

Factors Leading to the Purge

How did this happen to a city that has been a mecca for casino gambling ever since New Jersey legalized the practice in 1976 and the first Atlantic City casino, Resorts, opened two years later? After all, doesn’t “the house” always win when it comes to casino gambling?

Industry analysts point to several different factors that led to what has happened to Atlantic City casinos. The first is the simple fact that there is now much more casino competition in the mid-Atlantic region and along the Northeastern Corridor than there was in the past. A decade ago, the only casinos in this area were located in Atlantic City. Since then, other states have legalized casino gambling — including Maryland, Pennsylvania, and New York — and there are now at least 25 casinos in the region.

As a result, casinos are no longer a destination for many people as much as they are a convenience. People are less likely to plan a vacation to Atlantic City to gamble in casinos than they are to visit a casino close to home.

Not only were Atlantic City casinos competing against more casinos in the region, but they were also competing against more casinos in Atlantic City. In other words, the local casino market simply became saturated, with too many casinos chasing after slices of a pie that was shrinking. Total casino revenue in Atlantic City has fallen by almost half since 2006 — from $5.2 billion to $2.9 billion. In fact, the Showboat closed despite the fact that it was still profitable. Ownership stated that it was closing in order to reduce the total number of casinos in Atlantic City.

However, the other casinos that closed suffered losses this year. The Revel — which only opened in 2012 and was supposed to represent a turning point for Atlantic City casinos — lost a staggering $46 million in the first half of 2014, while the Trump Plaza lost $7.4 million during this time. The Trump Taj Mahal, meanwhile, lost $1.3 million during the first six months of this year, compared to a $12.6 million profit during the first six months of last year.

Necessary Pain

While this casino purge is painful for Atlantic City and the employees who are losing their jobs, the good news is that many casino industry analysts and executives believe it is a necessary step toward restoring the financial health of the surviving casinos.

In a recent report, Fitch Ratings predicted that most of the money that was spent at the closed Atlantic City casinos would be spent at other casinos in the city. For example, it expects that 75 percent of Showboat’s revenue and 60 percent of Trump Plaza’s revenue will be spent at other Atlantic City casinos. Fitch Ratings is forecasting $2.5 billion in revenue for all Atlantic City casinos combined in 2015, down from $2.9 billion this year.

What is happening to casino gambling in Atlantic City makes it clear that even in a business where the house always wins, this isn’t always enough to ensure that a casino will turn a profit and survive. Other market forces are at work, especially the age-old laws of supply and demand. If there are too many casinos chasing a fixed number of gamblers who have more and more casino options to choose from, then some of these casinos are going to have to close — even if the Donald’s name is attached to them.

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