BEATING THE ODDS: UNLOCKING THE FUTURE OF ATLANTIC COUNTY. Dyana Tanasy Princeton University. Robert Checchio Rutgers University

Transcription

1 BEATING THE ODDS: UNLOCKING THE FUTURE OF ATLANTIC COUNTY Dyana Tanasy Princeton University Robert Checchio Rutgers University January 30, 2006

2 1 Objective In this report, we examine the relative success of Atlantic City s economic growth in terms of gaming and non-gaming revenues compared to another major gaming location in the United States. After examining the similarities and differences between the two locations, we present a strategy for growing Atlantic County s economy to its fullest potential. We also address key transportation issues as part of the solution. 2 Atlantic City Background 1 Long before Atlantic City was founded, the island where it would be developed, thick with woods and lined with dunes, was the summer home of the Lenni Lenape Indians, an Algonquian-speaking people. These original summer residents named the island Absegami, meaning "little water", a term for the bay denoting that the opposite shore was in sight. Over time the name was transformed into the present-day Absecon Island. Early colonial settlers in South Jersey largely ignored the island because it could only be reached by boat. While the exact date of the first permanent settlement has never been determined, it is generally agreed that Jeremiah Leeds was the first to build and occupy a year-round residence on the island by By 1850, the potential attraction of the island's cool breezes and beaches was recognized and the idea for developing a resort was first promoted by Dr. Jonathan Pitney, a local physician. With transportation the key to development, Dr. Pitney joined with a group of businessmen to secure a railroad charter in Two years later, construction of the Camden-Atlantic rail line was completed at a cost of a little over $1.2 million. A civil engineer from Philadelphia, Richard Osbourne, designed the city layout and proposed the name Atlantic City. In March of 1854, the city was incorporated and eighteen voters elected the first mayor. On July 1, 1854, the first public train left Camden for Atlantic City, arriving two and a half hours later, an arrival that signaled the opening chapter in the resort's rich and colorful history. 1 This material is taken from the Atlantic City Free Public Library. Tanasy/Checchio Page 1 January 30, 2006

3 Atlantic City's proximity to major population centers, coupled with convenient, inexpensive train access, allowed thousands to flee the hot cities and enjoy summer pleasures at the cool seashore. The city grew rapidly and offered lodging, dining, entertainment and amusements for all ages, tastes and incomes. Attractions like the Boardwalk, amusement piers, floor shows and beauty pageants drew throngs of visitors, including many famous figures over the years. From the 1880s to 1940s, Atlantic City was a major vacation resort. In the 1920s, it was considered the premier tryout town for theatrical productions headed for Broadway and beyond. Beginning in the 1930s and over the next three decades, Kentucky Avenue was renown for its nightlife, with Club Harlem and other venues attracting the best talent and biggest stars from the world of jazz. During World War II, the city offered much more than entertainment distractions, serving as a training site for military recruits and a recovery and rehabilitation center for wounded soldiers. In the 1950s, as air travel to vacation spots in Florida and the Caribbean became more widely available, Atlantic City's popularity as a resort destination began to decline. By the 1960s, the city was beset with the economic and social problems common to many urban centers at the time. With the health of its economy entirely dependent on tourists who were now shunning the decaying resort, the city reached its nadir. 2.1 The Introduction of Gambling In 1976, the "Atlantic City Gamble" was launched when New Jersey voters approved a referendum legalizing gambling, specifically in Atlantic City but not elsewhere in the state. The following is taken from the State of New Jersey Gambling Study Commission, 1973: The work of this Commission was undertaken against a background of developing interest, both in this State and nationwide, in the potential benefits of legalized gambling. The reasons for this interest appear to be connected with certain emerging social and political trends, and (as typically expressed by proponents) are essentially threefold: Tanasy/Checchio Page 2 January 30, 2006

4 1. In an era of fiscal stringency, legalized gambling holds forth a promise of providing substantial revenues through as nearly a "painless" method as can be conceived. 2. In an era increasingly vexed by problems of crime and corruption, legalization of gambling is put forward as a means of (a) undercutting organized crime by depriving it of the revenues which it now derives from illegal gambling, most of which it controls; (b) freeing law-enforcement manpower and resources for use against both the "organized crime" and the violent "street crime" which alarm the citizenry and undermine social order, and (c) eliminating opportunities and temptations for the corruption of various public officials whose protection or connivance is necessary to the survival of most illegal gambling operations. 3. In an era when assertion of personal liberty against state control has been ever more vociferously expressed, the legalization of gambling would remove restrictions on personal action which many people resent as puritanical, hypocritical, repressive and archaic. 3 Gaming Industry Results State of New Jersey Gambling Study Commission, 1973 While there were many critics questioning the wisdom of pursuing legalized gambling as a tool of urban development, many others were convinced casinos would provide the resources needed to rebuild the city and its tourist trade. When the first casino, Resorts International, opened in 1978, no one predicted the rapid growth of the gaming industry in Atlantic City or the tremendous impact it would have on the city, the region and the state. By 1988, a dozen casinos were open and the number of annual visitors had grown from 700,000 in 1978, to over 33 million. By the year 2000, the city's tax base had skyrocketed from $316 million in 1976 to over $6.7 billion. The positive impact on Atlantic City residents can be seen in revitalized neighborhoods, new housing projects and public service facilities and economic, social and cultural programs. 3.1 Revenue It may be hard to believe, but Atlantic City s annual gaming revenues consistently rival those of Las Vegas, and, before the openings of Paris, The Venetian and Mandalay Bay in 1999, Atlantic City actually outperformed Vegas. For the first time, Atlantic City s 12 Tanasy/Checchio Page 3 January 30, 2006

5 casinos have pulled in over $5 billion in gaming revenue in They now share that elite bracket with Las Vegas, where casinos on the strip earned $5.34 billion in total gaming revenue from its 43 casinos in Assuming a 10% increase in 2005, gaming revenue on the Strip is estimated at $5.9 billion. 2 FIGURE 1: Gaming Revenue ( ) However, while the gaming revenue may be very close between the Vegas Strip and Atlantic City, the revenue from non-gaming entities separates the two cities. The Strip pulls in almost $4 billion annually in non-gaming revenue compared to Atlantic City s $400 million. Non-gaming revenue includes hotels, shopping, dining and entertainment. In recent years, the largest Strip casinos have reported a split between their gaming and non-gaming sources of revenue. The Borgata Casino Hotel & Spa continued to dominate, posting $704.4 million in revenues for the year, up 10.7 percent from the year before. But it was Tropicana Casino and Resort that saw the largest growth. Its revenues surged 21.4 percent to $441.9 million for the year, which analysts said was undoubtedly tied to its $280 million hotel, retail and entertainment complex, The Quarter. 2 Source: Atlantic City Free Public Library Tanasy/Checchio Page 4 January 30, 2006

6 FIGURE 2: Gaming and Non-Gaming Revenue Those properties with less to offer in terms of non-gaming activities had a tougher year. Sands Casino Hotel, the city's smallest gaming hall, saw its revenues drop 7.1 percent to $176.6 million. And the Atlantic City Hilton also saw its revenues drop 2 percent to $289.4 million, caused by an 11.4 percent drop in table game revenue. 3.2 Visitor Demographics According to the Nevada State Gaming Commission, the average Las Vegas casino patron s spending habits have not changed much, growing by about 1% annually over the past 10 years. However, with an increase in non-gaming activities, airport capacity, and a growing number of hotel rooms, Las Vegas has managed to increase the total number of visitors by about 10% annually over the same period. Atlantic City, on the other hand, has not experienced much growth in visitation, but makes up for it with increases in average revenue per visitor, about 5% annually over Tanasy/Checchio Page 5 January 30, 2006

7 the past 10 years. Of course, this growth applies solely to the city s gaming revenue, while the growth in Vegas applies to the non-gaming revenue as well. According to a survey by Harrah s Entertainment Inc., casino players have higher levels of education, higher incomes and are more likely to hold white-collar jobs, compared to the average American. However, this comparison points to casino players in destination playing which often requires travel and overnight stays. There is a sense that Atlantic City is not attracting this type of patron (i.e. the kind who fly to Las Vegas for a week of gambling, dining and shopping). In fact, Atlantic City's businesses have complained about "shoobies," a derogatory reference to daytrippers that dates back to an era when they carried their lunches in shoeboxes. FIGURE 3: Types of Visitor Trips While Las Vegas and Atlantic City report a similar number of annual visitors, the average Atlantic City visitor stays for about eight hours, while the average Las Vegas visitor stays about four days. This is not a totally fair comparison, as Las Vegas s location in the Nevada desert, far from any major metropolitan area, does not make it particularly appealing to day-trippers. On the other hand, Atlantic City s location at the Tanasy/Checchio Page 6 January 30, 2006

8 Jersey shore does not preclude overnight stays. In fact, one would think that a beach town would be more attractive to overnighters during the summer months. It is evident through the under-utilization of the Atlantic City airport, as well as the overwhelming percentage of visitor who arrive by car, that this is not the case. FIGURE 4: Trips by Type Furthermore, this problem is highlighted in Atlantic City s convention center -- despite being the second largest on the East Coast (after the Jacob Javits Center in New York), the center generates surprisingly little business. In Nevada, we see the opposite trend. McCarran International Airport is now the seventh busiest in the nation, transporting over half of the 35 million annual visitors to Las Vegas. In fact, highway traffic has been trending down, as the percentage of flownin visitors rises. According to the Las Vegas Convention and Visitors Center, convention and meeting travelers accounted for approximately 14% of Las Vegas visitors in However, it is not simply a lack of overnight visitors that is Atlantic City the city back. At peak times, there is a lack of available hotel rooms. Atlantic City offers about 15,000 hotel rooms, although casino expansion projects will add another 3,000 hotel rooms by By comparison, Las Vegas has about 125,000 rooms. Tanasy/Checchio Page 7 January 30, 2006

9 FIGURE 5: Total Hotel Rooms We also see in the Room Occupancy data an indication that there is a shortage of hotel rooms in Atlantic City. The very high room occupancy rate in Atlantic City (94%) indicates the potential for unmet demand. FIGURE 6: Room Occupancy Rates Tanasy/Checchio Page 8 January 30, 2006

10 4 Past and Planned Improvements and Expansions These problems with Atlantic City are not a surprise. A long anticipated second wave of development is now underway. The prospect of increased competition in the gaming market as well as the success of the five-year-old Atlantic City Convention Center have been catalysts for the development of new projects. In recent years, the city has attempted, with limited success, to use Las Vegas as a model to transform itself into a lucrative overnight destination. The Borgata, which opened in 2003, was the first casino to be built in Atlantic City since Several casinos have embarked on major expansions of their hotel and retail space, and a public-private partnership is building a $60 million retail and entertainment complex, The Walk, in the center of the city. In all, over $1.8 billion in new investments are planned or underway, and, for the first time since casinos opened here, most of the new projects are devoted to broadening the appeal of the city beyond gambling. Offering visitors a wide range of attractions is considered the key to a successful future, a formula that surely proved itself in the past when Atlantic City claimed the title "Queen of Resorts". Projects such as Showboat's House of Blues music club, Tropicana Casino and Resort's sprawling retail and entertainment complex, named The Quarter, and the upscale Pier at Caesars shopping center opening this year are helping Atlantic City to diversify. 4.1 Economic Impact All of these recent developments have worked well for Atlantic City. The Tropicana experienced its largest year-on-year gains since the opening of The Quarter, and the Borgata s numbers were even more impressive, topping all competitors and leading the way with non-gaming revenue accounting for about 20%. Moreover, in 2004, Travelocity listed Atlantic City as a top action beach, and the June 2004 issue of Conde Nast Traveler promoted the city s new image. Showboat, Caesars and Bally's casinos also are sprucing up their aging boardwalk entrances, and Casino Commission officials say at least two casinos (Resorts and Showboat) are considering adding hotel towers. In addition, the Casino Reinvestment Development Authority recently approved Tanasy/Checchio Page 9 January 30, 2006

11 of more than $100 million to revitalize the boardwalk the one thing with which Vegas would have a hard time competing. Even with these efforts, however, job growth in Atlantic City remains mostly flat. In comparison, job growth in Clark County has grown steadily over the past decades. EMPLOYMENT LEVELS Las Vegas MSA Atlantic City MSA FIGURE 7: Employment Levels in Atlantic City and Las Vegas MSAs To see why this is happening even as gaming revenues in Atlantic City largely match those in Las Vegas, we re-examine the source of revenues and the nature of visitors to the two locations. Remember that although gaming revenues in Atlantic City and Las Vegas are comparable, the non-gaming revenue in Las Vegas greatly exceeds that of Atlantic City. In fact, we see that in Las Vegas derives more revenue from nongaming sources than it does from gaming sources. This discrepancy is attributable to the types of visitors that are attracted to each location. While visitors to Las Vegas stay at least overnight, most visitors to Atlantic City apparently only stay long enough to gamble, and then return home. Las Vegas benefits from the overnight visitors by getting more revenue from lodging, restaurant, and retail sales. Tanasy/Checchio Page 10 January 30, 2006

12 5 Competition Ahead Given Atlantic City s infrastructure and environmental constraints, including the lack of a more modern airport, poor city environment, and the absence of non-gaming attractions, Atlantic City is far from being revitalized as a major tourist resort. Moreover, as neighboring states legalize gambling, Atlantic City s future will become even more uncertain. Atlantic City casinos are a maze of slot machines, and the machines share of the gaming revenue has been increasing, in both Atlantic City and Las Vegas. This growth points to the attractiveness of gaming where the player determines his own speed, has little or no interaction with casino employees or other players, and only needs to follow simple rules of play. Since these qualities do not rely on the quality of customer service, or the glitziness of the surroundings, casinos in other states could easily steal players away from Atlantic City. FIGURE 8: Gaming Revenue Breakdown (2005) Tanasy/Checchio Page 11 January 30, 2006

13 Atlantic City casinos already face increasing competition from slot machines in New York racetracks, and officials in Maryland and Pennsylvania and pushing to legalize slots there as well, where the proximity to Atlantic City is sure to siphon off some of the Jersey crowd. Moreover, Delaware and West Virginia now have casinos; the two giant Indian casinos in Connecticut are attracting New Yorkers; and Gov. Pataki wants to open three Indian resort casinos in the Catskills, 30 miles closer to the heart of Manhattan than Atlantic City, which is 130 miles away. According to an analysis by Harrah's 2003 Profile of the American Casino Gambler, more of the metropolitan Washington's 700,000 casino gamblers prefer Delaware or West Virginia casinos to Atlantic City. Baltimore and Philadelphia are sending a growing share of its gamblers somewhere else. And even though the New York metropolitan region's 5 million regular gamblers still favor Atlantic City, 13 percent go to Connecticut, and more will head to the Catskills when the opportunity comes. Moreover, with advances in technology, competition may become more widespread as players can satisfy their gambling desires without leaving their own front door. According to Richard Perniciaro, the director of the Center for Regional Business Research at Atlantic Cape Community College, the entire gaming industry may be run over the Internet within 25 years. FIGURE 9: Internet Gambling Revenue Tanasy/Checchio Page 12 January 30, 2006

14 6 Beating the Odds Because gambling is legalized across all of Nevada, Clark County has the benefit of offering geographically diverse casino locations, each drawing in different crowds and each generating different streams of revenue. While casinos on the strip depend heavily on hotel and food services, downtown Vegas brings in most of its revenue through gaming. Legislation in New Jersey keeps gaming limited to within Atlantic City, but we can still cater to other demographics by offering more entertainment zones within Atlantic County. In other words, Atlantic County would become the destination, with Atlantic City being the gaming zone within the county. Looking forward to the growing competition within the gaming industry, our proposed solution creates not only geographically distinct zones, but activity-based distinctions as well. 6.1 The Proposed Model Xanadu South Our model for the development of Atlantic County is the Xanadu Meadowlands currently under development. This development would occupy approximately 80 acres in eastern Hamilton Township, just west of Atlantic City International Airport. The Xanadu development has characteristics that make it suitable as a model: Provides room for expansion that does not readily exist in Atlantic City Creates opportunities for restaurant and retail sales space that does not exist in Atlantic City Provides experience in overcoming environmental issues FIGURE 6: Artist s Rendering of Xanadu Meadowlands Tanasy/Checchio Page 13 January 30, 2006

15 In this way, Atlantic County becomes a family destination, immediately introducing another demographic to the area people for whom having an overnight destination is an important factor in choosing a place to visit. 6.2 Xanadu Key Components Five key components distinguish Xanadu South from the current Atlantic City gaming environment: Lodging. As noted above, the occupancy rate of Atlantic City s hotel is almost 95 percent. This indicates a potential for many more hotel visitors, especially if there were reasons to visit beyond gaming. Conference Centers. With the current environment focused almost solely on gaming, Atlantic City presents an unattractive visage for spouses and children of potential conference attendees. Developing a destination that is family center will increase the likelihood that business will chose Atlantic City as a business conference destination. Restaurants. Once visitors begin to stay overnight, and bring family members with them, the restaurant trade will increase dramatically. Family-focused Entertainment. A key to the success of Xanadu South is providing entertainment that is suitable for the entire family in a safe environment in which people are comfortable traveling from one attraction to another, regardless of the time of day. Sports and Amusements. Rounding out the list of key attractions is sports and amusements, key to attracting visitors in the age group. 6.3 Benefits The benefits of Xanadu South come from three primary areas: jobs, economic development, and tax revenue. Jobs. A project based on Xanadu Meadowlands will create 20,000 jobs during the construction phase. The completed project will provide 20,000 Tanasy/Checchio Page 14 January 30, 2006

16 permanent jobs to the region. As seen in Attachment 1, Atlantic County had the sixth highest unemployment rate among New Jersey counties in Economic Development. Due to multiplier effects, the incomes from the 20,000 jobs will generate additional economic development throughout the region, including those counties in south New Jersey that also have higher than average unemployment rates. Based on comparisons with Xanadu Meadowlands forecasts, millions of dollars of tax revenues will flow to the surrounding communities. 6.4 Key Issues Two key issues must be overcome for Xanadu to become a reality overcoming environmental concerns and involving key stakeholders Environment Overcoming environmental concerns must be a high priority for the sponsoring organization. The Xanadu Meadowlands project was chosen as a model for Xanadu South because of its success in resolving environmental issues. It is expected that the sponsors of Xanadu South will enlist the help of environmental development consultants to learn from the Xanadu Meadowlands precedent Involving Casinos The influence of the Casino Reinvestment Development Authority and individual casino owners will be key to implementing the transportation infrastructure (described more fully in the following section). Once the ability of Xanadu South to attract (and retain as overnight visitors) greater numbers of visitors, casino owners will want to have transportation hubs located at or near their casinos. 7 Tying It All Together - Transportation The key to the success of the destination as a whole is the interconnectivity that is required to move within the zones. A Personal Rapid Transit (PRT) system would provide this network, as well as keep the region largely automobile-free. The goals of a PRT system are: Tanasy/Checchio Page 15 January 30, 2006

17 Eliminate the need for personal automobiles Connect Xanadu-South to: o Atlantic City International Airport (ACY) o Atlantic City The Boardwalk o Park-and-Ride Centers at appropriate locations at AC Airport and near the Garden State Parkway Atlantic City Expressway The Atlantic County PRT system would alleviate the problem of parking garages, which are expensive to build and are not an attractive use of space. By providing a central, free parking area (located near the Atlantic City airport), the PRT system would immediately leave room for casino expansions into their newly unoccupied parking garages. This would also permit the construction of car-free zones enhancing the ambiance of Atlantic City. By requiring visitors arriving by auto to park at outlying areas and use the PRT to travel to Xanadu South and to various attraction within the complex, Xanadu South becomes environmentally friendly, quiet, and pollution-free. The PRT system that we use as a model is the University of West Virginia at Morgantown. The picture below shows one of the PRT vehicles. Additional information is available at FIGURE 7: The Morgantown Personal Rapid Transit System Operating costs can be subsidized by selling interactive advertising space inside the PRT vehicles and on the sides of the vehicles, providing a source of advertising revenue. It is also envisioned that PRT vehicles will be equipped with on-board processors that provide an interactive experience to riders as they travel from their arrival area to the Xanadu attractions. The experience will include interactive Tanasy/Checchio Page 16 January 30, 2006

18 maps allowing riders to see where they are in the area and to obtain printed maps containing directions to destinations they select. The interactive devices will also be able to provide discount coupons on demand as riders are exposed to advertising on onboard viewing monitors. 8 Conclusions By relying solely on gaming revenue, Atlantic City has failed to realize its full potential. In contrast, Las Vegas planners saw the need to offer potential visitors more than just gaming as an attraction and began building destinations that emphasized lodging and retail. With increasing competition from gaming locations in nearby states, Atlantic County planners need to think beyond the constraints of current development and design the types of facilities that will attract an entirely new demographic. Xanadu South meets that requirement.

19 ATTACHMENT 1 Unemployment Rates in New Jersey by County Unemployment Rate (percent) FIPS* Name Cape May County Cumberland County Median Household Income (2003) % of State Median HH Income $42, % $37, % Passaic County $46, % Hudson County $38, % Essex County $42, % Atlantic County $43, % Camden County $47, % Salem County $46, % Union County $53, % Ocean County $48, % Gloucester County $56, % New Jersey $56, % Middlesex County Monmouth County $59, % $68, % Bergen County $63, % Burlington County $61, % Mercer County $55, % Warren County $58, % Sussex County $69, % Somerset County $77, % Morris County $79, % Hunterdon County $84, % Sources: Bureau of Labor Statistics, Local Area Unemployment Statistics (LAUS) data. Bureau of the Census, Small Area Income & Poverty Estimates Program Tanasy/Checchio Page 1 January 30, 2006

20 References The Atlantic City Convention and Visitors Authority Baker, Michael B. Casino Revenue Surpasses $5B. Press of Atlantic City Jan. 11, Eadington, William R. An Analysis of the Recent History and Likely Future of the Nevada Gaming Industry. Institute for the Study of Gambling and Commercial Gaming, Klatzkin, Larry. Night & Day: Getting to the Same Place Two Different Ways. Global Gaming Business Dec Meyer-Arendt, Klaus, and Rudi Hartmann. Casino Gambling in America: Origins, Trends, and Impacts. Cognizant Communication Corporation, Peterson, Iver. Atlantic City Seeks New Image: Las Vegas s. New York Times May 6, Sloan, Gene. Atlantic City Moves Closer to Las Vegas. South Jersey Magazine Feb Walker, Terri C. The 2005 Casino & Gaming Market Research Handbook (CD). Casino City Press, Tanasy/Checchio Page 2 January 30, 2006