Are 12 Atlantic City casinos too many?

By Michael Busler

At a recent gaming conference, a well-respected market analyst commented on the number of casinos operating in Atlantic City and their declining revenue, which has fallen for six straight years. His view was that at least two of the casinos should close in order that the remaining 10 can be profitable. Is he right?

The Atlantic City casino market has operated close to the way economists would expect. When the first casino opened in 1978, it was extremely profitable. Investors recovered all of their capital in a short time and reaped high profits even as more casinos were built.

The high profit attracted more investment. Mega-resorts, such as Borgata, soon followed, as operators realized even larger profits could be made by offering a total entertainment experience.

The casino boom eventually provided hundreds of millions of dollars of annual revenue to New Jersey. Other states, seeing the positive economic impact, started to legalize casino gambling. Soon Atlantic City had competition from New York, Connecticut, Delaware, and Pennsylvania, including Philadelphia. The Keystone State has done so well its gaming revenue now exceeds Atlantic City's.

Couple the competition with a severe 2008 recession that seems not to have really ended, and Atlantic City's gaming revenue is now about 40 percent less than it was at the peak. Can that support the 12 casinos?

The likelihood of increasing gaming revenue in Atlantic City while there is this much competition is very low, but not impossible. But in order for the casinos to survive, they will have to generate revenue from other sources. That follows logically from the Borgata model, which offers a more complete entertainment service. Resorts, for instance, is building the Margaritaville-themed expansion, and the city itself is attracting more events.

As with any business sector when revenue declines, costs must decline. Though that is admittedly painful, it must happen if the firms are to survive. For the marginal casinos, the capital cost has been reduced dramatically as they are sold to new operators at about a 90 percent discount. That is exactly what happened to the four weakest casinos in the last few years: Trump Plaza, Trump Marina, Atlantic Club, and Resorts.

Even more painful, labor costs must also fall. That means no wage increases for many employees, a reduction in wages for some, and a reduction in the number of employees. That pattern continues today and does have consequences, particularly in the area of customer service.

Gamblers and tourists must, however, have a reason to go to Atlantic City. Currently, marketing efforts are geared to show that fun and entertainment can be found when you "Do AC." That effort is also trying to dispel the false perception that Atlantic City sustained considerable damage from Hurricane Sandy.

Marketing may hold the key. Some casinos may market to a very specific niche. (It has been rumored that one casino is considering specific outreach to the Asian American community.) Beyond that, the marketing will have to differentiate the casino experience: You can gamble anywhere, but Atlantic City is the only place where you can gamble and go to the beach, or (in the winter) gamble at three different casinos without going outdoors, or gamble and have a great shopping experience, or gamble and go to a top club.

The bottom line: All Atlantic City casinos can survive if they can become more competitive. And I would bet on that.