Gaming Industry Far from Recession-Proof

Oops, Wall Street got another industry wrong. After proclaiming that casinos were recession-proof, they've recently learned just the opposite. Here's what one mutual fund manager said before the downturn:

 

“Gaming stocks perform much more like consumer staples than consumer discretionaries. When you look at the long run, people are going to gamble no matter what.” – Dan Ahrens

 

Here's what happened to gaming industry stock prices:

Just a couple of months before the gaming industry stock prices hit their peak, economists sharply raised their estimates of the risk of recession. What happened?

According to a Wall Street Journal story (subscription required), the gaming industry is hurting:

• Four casinos have filed bankruptcy this year
• Several gaming companies have defaulted on their debt
• Moody's has downgraded the debt of 17 gaming companies, with 11 more on watch for possible downgrades.

In addition to these signs of distress, the casino expanded rapidly in recent years, and now sees consumers cutting back on discretionary spending. Boutiques and restaurants are vital to casino profitability these days, so spending is critical.  Travel costs are up, whether for airfares or gasoline. And the local market in Vegas is hurting because of the collapse of residential home prices, down 12 percent in the last four quarters.

My own calculations for my book, Businomics, indicates that the change in consumer spending on gambling at casinos is -7.8 percent from peak to trough, a little milder than average for consumer spending. (See details here by scrolling to row 231; definitions at the bottom of the worksheet.) If you had used this information in combination with the rising risk of recession, you would have sold gaming stocks in the neighborhood of the peak. If you had bought the industry's self-hype that it was recession-proof, and held your gaming stocks, you would have had a 38 percent loss--so far.

Business strategy lesson: before you believe the industry lore that your business is recession-proof, you should look at the data.

Comments

[kaps]

with flight rate rising, number of flights to las vegas getting reduced, lots og people are avoiding travel to las vegas these days..

[borisb]

gambling trips to las vegas with declining home equity, declining 401k values, layoffs, $140 oil, $8 corn? funny ha ha.

[QuestionMark]

I've been looking for parts to an engineering software class computer. It's only 3 years old. I just called an Intel distributor and complained about the lack of availability, including that from his company, after such a short period of time. His response was that if blame was to be cast for this, it was on the gaming industry, as that was driving innovation (and obsolescence). He stated that last year gaming (in all its forms) was a 20 billion dollar plus industry. So far this year it is over 30 billion plus. He also stated that there have been deaths because people who engage in "gaming" over the Internet have died of malnutrition. His inside knowledge of the industry, he said, comes from having worked inside of it. (So how come he's not still there?)

Personally I welcome the downturn in the economy, as it seems there needs to be a reality check on what is considered useful time spent, in moderation, with one's free time. If this activity is becoming so pervasive that it negatively impacts useful pursuits, then, it would seem, only financial burdens are going to modify behavior in directions that benefit all of us, and not just those in the gaming industry.

Personally, I welcome this new recession for the stated reasons, and hope it will only last long enough to create a sense of real value in people's lives.

What do you think?