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Recession-proof? Maybe not this time

As the country faces its worst financial crisis in decades, experts say sectors once considered relatively immune to economic hardship could start feeling the pinch.
Image: Vegas economy
Think gambling is recession-proof? You might not want to bet on that.Isaac Brekken / AP file

For years, Starbucks’ coffee drinks were considered the type of affordable luxury that could withstand the ebbs and flows of the U.S. economy.

Americans, the thinking went, might cut back on big expenditures like a new car or a new couch in an economic downturn, but they’d still feel justified in treating themselves to a frothy coffee drink when they were having to deprive themselves of so much else.

That sort of conventional wisdom was thrown out the window about a year ago, when Starbucks conceded that the once high-flying company was losing its footing. It has since been forced to close stores and lay off workers as profits have plummeted.

While Starbucks certainly has made its share of missteps, it’s clear that part of its problem is simply that more and more Americans began to question whether they could really afford a $4 coffee drink when that money could be going to more pressing needs like gas, food or heating bills.

Starbucks isn’t the only company that could be hit unexpectedly hard in this downturn. As the country faces its worst financial crisis in decades, experts say sectors such as gambling, cigarettes and entertainment — all once considered relatively immune to economic hardship — could start feeling the pinch of the country’s current belt-tightening.

“The things that have been recession-proof in the past are proving to be punished by this recession,” said Burt P. Flickinger III, managing director of Strategic Resource Group.

That’s partly because this downturn — which has not yet technically been declared a recession — could end up being much worse than others in recent memory. But it also comes as more Americans are finding themselves with little if any savings, and less access to credit, leaving them with less money to spend on the escapist splurges that might otherwise have fared better in a downturn.

“The consumer is more cash- and credit-constrained than any time during the last four decades,” Flickinger said.

Flickinger also thinks the companies behind those sectors share some of the blame, because they aggressively pushed up prices for everything from movie tickets to premium television during the good times. That, in turn, is making it harder for some Americans to justify an increasingly premium TV package, or night at the movies, in downtimes.

The troubles for companies such as Starbucks also could be exacerbated by the fact that this economic downturn has included widespread difficulties in traditionally well-paying areas such as financial services.

“Some people that probably thought they were largely invulnerable to a recession are finding themselves vulnerable,” said Ken Mayland, president of the forecasting firm ClearView Economics.

Although it is still too early to say how much these sectors will be hurt by the downturn, some troubling signs are emerging.

Even — or especially — when times are tough, the common assumption has been that people will continue to gamble for relief and the hope of striking it rich. But Keith Schwer, director of the Center for Business and Economic Research at the University of Nevada, Las Vegas, notes that that type of thinking was based on the more shallow recessions such as the ones in 1991 and 2001.

With the economy appearing to be in deeper despair, gaming companies and the Nevada economy as a whole is already grappling with hard times.

MGM Mirage reported an 8 percent dip in casino revenue in the third quarter ended Sept. 30, and the company halted development of a new property in Atlantic City, N.J., citing the weak economy and tight credit conditions. Harrah’s Entertainment swung to a loss in the same period, and also blamed its woes on economic upheaval.

For Las Vegas specifically, Schwer said part of the problem is that gaming is now much more widespread in the United States, meaning that people can gamble locally without the expense of a trip to Vegas. Many gaming companies also were in the midst of expansion when the economy started to turn, meaning stiffer competition.

“Not only is the economy slowing and there’s less business, but we’re dividing it additional times with new properties,” Schwer said.

Conventional wisdom also has held that people will smoke and drink alcohol even when budgets are tight. But that assumption is now being tested. Altria Group, whose holdings include cigarette maker Philip Morris USA, recently told The Associated Press that it had started to cut jobs because of economic turmoil.

Even if they are cutting back elsewhere, many have believed that people will continue to think of their cable television as another utility, like water or electricity, and keep paying the bill even when their budgets get tight. But this time around, Flickinger said his research is showing that premium television is one of the first items people are cutting back on in parts of the country that have been hard-hit by layoffs or other labor strife.

“The first thing to go is cable, the second thing to go is the phone, the third thing to go is the second car and then the fourth thing to go is the house,” Flickinger said.

While it’s still early days, there are signs those individual decisions are starting to impact providers. Satellite TV provider Dish Network Inc. recently reported a net loss of 10,000 subscribers in the third quarter ended Sept. 30, and it cited the weak economy as one factor in the loss of business. In a regulatory filing, the company also warned that bad economic conditions could impact consumer demand for pay-TV services going forward.

Those cable providers who have expanded into Internet and phone offerings may be better poised to survive a downturn because they have more diverse sources of revenue.

As the economic downturn continues, many also will be watching closely to see how much it will affect people’s appetite for sporting events. Rodney Fort, a professor of sports management at the University of Michigan, expects that sports revenue will be impacted by the downturn, with hockey and baseball feeling more of a pinch than basketball and football.

Still, he said it’s hard to say how much any sport will be impacted at this point because there isn’t reliable data from similar downturns in the past. While it’s true that attendance famously rose at sporting events during the Great Depression, Fort said it’s not clear that revenue also improved.

Fort also noted that the sports industry has changed substantially in recent decades. Not only has television revenue become much more important, but ticket sales have become more dependent on high-income fans and corporations willing to shell out for pricey boxes and season tickets.

Many also have traditionally believed that people will continue to splurge on a night out at the movies even when times are tight. But some expect that theory to be tested this time around as well. That’s partly because the cost of buying a movie ticket and snacks has risen substantially in recent years, and partly because it’s become easier to rent a DVD or get one for free from the library, and pop your own popcorn.

“(Watching) a DVD on the widescreen TV sets that a lot of people already have is a pretty good substitute for going to the movies, so I wouldn’t bet my life on the fortunes of movie theaters,” said Mayland, the economist.

Nevertheless, some in the industry remain optimistic. In a conference call with analysts last month, Regal Entertainment Group Chief Executive Mike Campbell conceded that prices have gone up, but said a trip to the movie theater remained less expensive than other forms of entertainment.

“Our industry is probably as recession resistant, based on historical facts, as any that I'm aware of,” Campbell said in the earnings conference call.