IE 11 is not supported. For an optimal experience visit our site on another browser.

High-stakes gamble: How Disney beat Vegas

With the economy sputtering, this is not a good time to take a gamble. Las Vegas has, and it’s hurting casino profits. Disney has not, and the “Magic Kingdom” is reaping the winnings.
Image: Disneyland
Walt Disney Co.'s offering of lower-priced accommodations and vacation packages is helping it weather the economic storm.Damian Dovarganes / AP file
/ Source: The Associated Press

This is not a good economy to take a gamble in.

Las Vegas has, and it’s hurting casino profits. Disney has not, and the “Magic Kingdom” is reaping the winnings.

In theory, it’s not supposed to be this way.

The gaming business often brags that it’s recession-proof because gamblers will always like to gamble, but amusement destinations historically have seen their business get hit hard when consumers’ wallets are pinched.

The upscaling of Las Vegas with its five-star hotels, restaurants and shops, and the down-pricing of Disney to more value-oriented park packages and hotels over the last decade has turned that concept on its head.

Plunging housing prices and soaring costs for gas and food have made Americans more mindful of their spending. Their financial wariness has the potential to hurt vacation destinations everywhere.

Yet Walt Disney Co.’s theme parks and resorts have enjoyed surprising success. They helped increase the company’s fiscal second-quarter earnings by 22 percent from a year ago, to $1.13 billion, or 58 cents a share. Analysts had been expecting 51 cents a share.

Revenues in the parks and resorts division shot up 11 percent to $2.7 billion during the quarter, a gain that was partially driven by an increase in foreign travelers visiting its U.S. parks to take advantage of the weak dollar.

But CEO Robert Iger also said the company’s broader offering of lower-priced accommodations and vacation packages is helping it weather this economic storm better than it did before.

In 1991, more than 55 percent of hotel rooms at Disney World were considered premium priced. Now, about 75 percent of rooms there are considered moderate or value priced, Iger said in a May 6 conference call with analysts. Moderately priced rooms range between $149 and $240 a night, while value rates are between $82 and $151 a night.

“We believe creativity, focused capital investment and strategic pricing have helped to make us more resilient to economic downturns than in the past, and our recent results are evidence of that,” Iger said.

While Disney’s business model has been trying to capture more visitors down the income ladder, Las Vegas has done the reverse. The famed Strip’s cheap hotels and all-you-can-eat buffets are mostly gone, replaced by first-class resorts, fancy restaurants with celebrity chefs, luxury retailers and high-end spas.

Gambling, once the lifeblood of this desert mecca, now accounts for 41 percent of Las Vegas’ revenues, while 58 percent comes from sales of food, beverages, rooms and shopping, according to a report from the investment firm Deutsche Bank. That is the exact opposite of what it was during the 1990-1991 recession.

“We were recession-proof when gaming was the No. 1 source of revenue,” said Sig Rogich, who heads a marketing firm bearing his name that advises casinos. “Now the paradigm has shifted, and we get hurt when people decide to eat out or shop less.”

Gambling revenues were down 4 percent for the greater Las Vegas area during the first two months of the year. Should that pace continue through year-end, it would be only the second time since 1970 that gambling revenues have fallen. The last time was after the Sept. 11 terrorist attacks when they fell about 0.5 percent and then were slightly lower in 2002, according to the Las Vegas Convention and Visitors Authority.

Through the end of February, the number of conventions held in Las Vegas had dropped 10.4 percent, and average daily room rates were off 3.8 percent to about $130, according to the most recent data available from the LVCVA.

This pullback is showing up in the quarterly results of those with big properties on the strip. MGM Mirage Inc. said business at its high-end Bellagio and MGM Grand was weaker than expected during the first quarter. Big mall company Simon Property Group Inc. also noted weakness in the Las Vegas market, where its properties include the luxury Forum Shops at Caesars and two outlet centers.

“We’re seeing some softness in Nevada, Las Vegas, for the first time in quite some time,” said CEO David Simon during a conference call with analysts on April 29.

Keith Schwer, director of the Center for Business and Economic Research at the University of Nevada at Las Vegas, said discounting will likely intensify in Las Vegas as it looks to win back visitors in the coming months. There are 135,000 rooms in Las Vegas, an increase of 1.5 percent from a year ago. Some 40,000 additional rooms are slated to be built over the next few years.

“If they offer the penthouse suites at Motel 6 prices, then people will come,” he said. “People may be more willing to visit if they can see some value for their money.”

Suddenly cheap is in, something Las Vegas has spent a decade running from. Maybe it’s time the Strip took some lessons from “The Happiest Place on Earth.”