TThe story of Revel, the new mega-casino in Atlantic City, took another interesting step yesterday when they filed for Chapter 11 bankruptcy with a pre-packaged financing package.  Most who follow the casino industry expected the Revel bankruptcy filing although most thought it would happen later this year.  The financial troubles of Revel were the talk of the industry after they put out month after month of anemic gaming revenue.  Over the past few months, Revel has been one of the worst performing casinos in Atlantic City from a gaming revenue perspective (astonishing if one looks at the decrepit competition).  They have been generating around $8 million of gaming revenue a month compared to the Borgata which leads the town at around $50 million per month.  When they built the $2.4 billion casino the owners projected $60 million of gaming revenue a month.  Think about that for a second.  That is over $50 million a month less than they thought they would generate or over $600 million a year!

Before going too far into this, here are a few key facts people should understand about what the Revel bankruptcy filing means:

• Revel will continue to operate and is not closing
• Consumers will not be impacted at all
• Revel has enough cash on hand to handle all gaming needs so if one wins a big jackpot they do not have to worry about being paid off (New Jersey Gaming Commission regulates this)
• Subject to a bankruptcy judge approving their plan, the current management team, employees, owners and lenders will stay in place in some form but with a different capital structure (i.e., a smaller amount of debt and different ownership percentages)
• In this case, many of the lenders were also the owners of the casino so this was an expected move and provides them some time to fix the resort’s issues and some oddities in the capital stucture.  If it doesn’t get fixed, expect to see new investors swoop in to acquire the casino and make some serious changes

Unfortunately for Revel, their issue is not just too much debt.  Unlike most casinos, Revel loses money every single second their lights are on.  Why is that? There are 3 main reasons: a flawed strategy, an even more flawed design and a tough Atlantic City economy.  Here is a look at each:

Strategy
Revel opened with the idea that it would be a resort that happened to have a casino.  Imagine the Atlantis in the Bahamas without the good weather, dolphins and water park.  The idea was that non-gamers from New York would drive 3 hours to eat at good restaurants, go to nightclubs and relax in a nice spa.  Reflect on that one for a moment.  Why would one leave New York City for restaurants, nightlife or a spa? Perhaps it would be an interesting get away once a year but that is about it.  They were able to have some success when they hosted mega events like Beyonce’s comeback concert post the birth of Blue Ivy.  The place was packed that weekend.  Unfortunately there are not enough events like this to get people from New York to make the drive.

The other issue with this strategy is that it leaves Revel empty during the week.  Their answer to this was to build a convention center with the hopes of attracting big conventions (they are the only real convention space in Atlantic City).  It is no surprise that event coordinators across the country haven’t been jumping through hoops to book their conventions in Atlantic City.

Design
Revel is beautiful.  When one walks through the resort, it is apparent that a lot of money was spent (maybe not $2.4 billion but still a lot of money).  The rooms are very nice as well – imagine a W room but more luxurious.  There is one issue that absolutely kills Revel and its ability to generate real gaming revenue – the escalators.  The escalators kill the casino in a few ways:

• Getting from the hotel room to the casino requires a ride in the elevator down to the lobby floor followed by a legitimate 100 yard walk to a set of escalators (2 really big ones) down to the casino floor.  It takes forever for even a young healthy person.  If you are elderly or drunk? Forget it.  The elevators from the rooms do not stop at the casino level – that is a blatant disregard of Casino Design 101.  Rumor has it that when casino mogul Steve Wynn toured the casino prior to opening he laughed out loud (and he is basically blind)
• When entering or leaving the resort, there is no need to pass through the casino.  After parking the car one enters and gets on the escalator up to the check-in area in such a way that the casino is easy to avoid.  Again, it is Casino Design 101 that the goal is to have as many people as possible walk through the casino so they can hear the bells, whistles and screams of joy associated with winning.  The slot machines are programmed so it sounds like someone is constantly winning.  The cheering coming from the craps table is meant to entice play. Casinos make real money from people making an impromptu stop to pull a slot or roll some dice
• Revel does not allow smoking.  If one is gambling and wants to smoke they have to leave the resort to do so.  That requires a long walk and another ride on the escalator that takes forever (not to mention standing in the cold).  This may sound silly for some but it makes a big difference.  Gambling and smoking go hand in hand.  Hard core gamblers have commented that the long walk is a real pain and has made the gaming experience sub-optimal
• The escalator is actually dangerous.  The resort is known for its top-notch nightclub HQ.  What comes with a good nightclub? Lots of drunk people.  Revel has already had someone plummet to their near death.  While it is a nice design element, it is unsafe and unnecessary

Atlantic City economy
Atlantic City is really struggling.  Back in the Boardwalk Empire days, it had a monopoly on east coast gambling. Since then, both of the big feeder states have legalized casinos.  Pennsylvania has large resorts with slots and table games.  New York City has a casino with slot machines and video table games (most New Yorkers don’t know this but there is a casino out by JFK airport).  This has put an immense amount of pressure on Atlantic City.  Why make the long drive when a casino is a subway ride away?  There are just too many casinos and rooms in Atlantic City.  Facilities like the Borgata have been able to survive (although performing worse than they used to) but it has gotten more difficult.  Hurricane Sandy did not help the situation but the good news is that the city has survived and the casinos are all up and running business as usual.

So what is the answer for Revel? How do they ensure that this is the last Revel bankruptcy?

It is actually fairly simple.  They need to revamp their strategy and focus on real gamers.  They actually started this process months ago by beginning the blocking and tackling that all good casinos do: marketing, comps, special prize drawings, accessible food options, etc.  Making Revel a destination is fine but their core has to be the gamer.  They need to take a page from Steve Wynn’s book.  He has a core set of gamers that drive his gaming revenue and overall success. His icing and cherry on top are the masses of party kids who come in for his beach club and famous DJs.  Revel also needs to get its beach club open on time.  This could be a real draw as there is nothing like it on the east coast.  New Yorkers will take the ride down to party on the beach with top DJ talent.  That being said, bringing in the core gamer is the only way they are going to move from that $8 million a month in gaming revenue to $60 million a month (or even $30 million).

The other key thing that needs to be done but probably won’t happen unless the casino continues to fail – fix the escalator/elevator situation.  They can keep the escalator there but need figure out a way to get the elevator to go from the hotel room floors to the casino floor.  People have said that the fix is possible. Even if it costs hundreds of millions to fix, it is still worth it given how much money they are hemorrhaging right now.  They also should create a smoking room somewhere on the casino floor. Smoking is bad for you but if they want to compete with Borgata and Showboat, they need to accommodate the smokers in some way.  By having a separate room for smokers they can do it without harming everyone else.

The Atlantic City economy is not something the folks at Revel can control.  The answer to this one is quite clear – several casinos need to close.  There is just too much supply. Trump Entertainment just sold the Trump Plaza for a paltry $20 million.  The owners of Revel would have been well served to pony up that $20 million and send in the demolition crew.  If Atlantic City can get to the right amount of rooms, there is no reason why it can’t be a steady maybe even thriving economic center for Southern New Jersey.

Comments

Comments