Selling luxury in the Great Recession

The laws of supply and demand aren’t sentimental, particularly when it comes to hotel rooms. No matter what kind of rate a suite might have gotten in the past, when there are more beds than bodies to fill them, the room rate will go down. But when running a luxury property, there are concerns beyond just filling rooms tonight: Long-term position of the hotel’s “brand” can make price-cutting a double-edged sword.

This might be the biggest problem that Las Vegas casino resorts, particularly those on the luxury end, are facing today. Since the start of the recession, the total supply of rooms in town has increased from 132,900 to 148,900, or about 12 percent. In the same period, the numbers of visitors coming to town has declined by about 7 percent.

Considering that most of the rooms are in resorts that are more about luxury than bargain-hunting (the Palazzo, Encore and CityCenter’s hotels fill that bill) and that those who are still able to visit Las Vegas are spending less, it’s no surprise luxury properties are facing an unprecedented crunch.

The easy solution is to drop prices, putting pressure on operators further down the amenity food chain and cutting short-term revenue per room, but that can have bad consequences long term.

Offering rooms for $50 a night, for example, makes it hard to charge $200 again when demand picks up; the value of the room has been diluted. So savvy marketers are suggesting other approaches.

“Instead of just slashing prices across the board, you can selectively comp rooms,” says Aaron Righellis of Up All Day Creative Solutions, a Las Vegas-based marketing company that works with area casinos. “If you comp a room, you’re not diluting your brand; you’re giving customers a value in the hopes that they’ll spend money elsewhere.”

This is Casino Marketing 101, but it goes against the price-cutting stampede that overtook casinos as the economy wilted. And as Righellis points out, how you frame a discount is sometimes more important than how much of a deal you’re offering.

“A two-for-one promotion, where customers pay for one night but stay for two, speaks more loudly than a 50 percent cut in room rates, even though the bottom line for the hotel is the same. For the customer, it’s a more positive message: The value of the room hasn’t dropped, but you’re getting a great deal.”

The recession is making some casinos rethink how they appeal to guests, and Righellis thinks this isn’t a bad thing.

“Over the past two years,” he says, “we’ve seen Vegas getting back to its core values: great room rates and great deals. That’s bringing people in and keeping them focused on gaming.”

It’s not that casino managers have become philanthropists. They’re still looking to maximize revenues, which means getting customers to spend. It’s just that they’re more willing to offer better deals to get people in the door.

A look at the numbers bears Righellis out. For most of the decade before the recession, hotel occupancy percentages bounced around the upper 80s and lower 90s. After charting a high of 94 percent in 2007, the recession shrank the percentage of hotel rooms occupied to just over 85 percent in 2009, the lowest occupancy rate for Las Vegas since 1991. This year, despite a huge growth in supply (not only CityCenter’s 6,000 or so rooms, but also the Westgate Towers at Planet Hollywood’s 1,200 suites), the monthly occupancy rate has edged over 86 percent and seems to be improving.

Gaming revenues, however, have at best stopped declining as rapidly as they were last year, which is why, as Up All Day partner Michael Bohn points out, smart operators are broadening their customer base.

“They should be putting out stronger offers for locals and the drive-in market,” he says. “Why not take a flyer on a local player who will not spend as much per trip, but who’ll come back more often. The overall value is going to be there, even if you don’t see it right away.”

With most visitors coming to town with less money in their pockets, that might not be a bad strategy for every guest, no matter where they’re from.

No one knows when the recession will end, or what the Vegas landscape will look like when it does. But those who are planning ahead are thinking not just about survival, but also the future.