More Bad News for Atlantic City Hotels and Casinos

The resort town once had a monopoly on the East Coast casino business, but those days are long gone.

Jul 1, 2014 at 9:30AM

At one time, Atlantic City was the Las Vegas of the Northeast. The coastal city was full of thriving casinos stuffed with customers from New York, Boston, Philadelphia, and other East Coast locales who wanted to gamble but didn't want to travel to Nevada.

That's slowly changed as casinos continue popping up in other East Coast cities and the megaresort Foxwoods and Mohegan Sun casinos opened up a few miles apart from each other in Connecticut. Now, instead of hopping on a plane or suffering a five-hour ride to Atlantic City, gamblers in New York and much of New England have options less than two hours away.

This has been bad news for Atlantic City. The Atlantic Club casino closed in January. Two weeks ago, the gambling mecca's newest casino, Revel, filed for bankruptcy for the second time in two years.

But perhaps the biggest sign of the region's struggles came last week when Caesars Entertainment Corp. (NASDAQ:CZR) announced it will close Showboat Atlantic City effective Aug. 31.

The company blamed the closure on a persistent decline in business, exacerbated by the high property-tax burden in Atlantic City. Caesars CEO Gary Loveman called it "a necessary step to help stabilize our business in Atlantic City and support the viability of our remaining operations in the vicinity."

Caesars remains the largest operator in Atlantic City, running three other properties. 

How bad is it?
However you look at it, Atlantic City is in trouble and the situation is unlikely to improve even as the economy strengthens. Gambling revenue in Atlantic City was down to $2.9 billion last year, from a high of $5.2 billion in 2006, The New York Times reported.

Though it's easy to blame Foxwoods and Mohegan Sun due to their size, the worst of the downturn started about eight years ago, when the first of a dozen casinos opened in Pennsylvania. New York, Maryland, and other surrounding states have since opened or added casinos. 

Caesars' four Atlantic City properties saw a 14% drop in net revenue this winter versus last year, which Loveman blamed on the increased competition.

"There is too much capacity in Atlantic City currently, such that the returns to existing capacity are under great pressure," Loveman said in a May Philly.com report. "When the Revel joined the market, as you all know, it didn't do anything to grow it, instead it just took a portion of the existing level of activity." 

Atlantic City has too many casinos, too many hotel rooms, and too few visitors. Losing a historic property like the Showboat is sad, and it will be sadder still if the $2.4 billion Revel is shuttered. But the city needs to be retooled to reflect the declining customer base. If there are too many hotel rooms and places to gamble, competition for guests and gamblers forces lower prices. That may be good for consumers, but in the long run, it's bad for business.

The closing of The Atlantic Club and The Showboat may not be the only shutdowns needed in order to right-size the industry.

"It's possible we'll see one or two more closings," Alex Bumazhny, a casino analyst at Fitch Ratings, told The Times. "There's definitely room for consolidation. People recognize that Atlantic City won't disappear, but the declines aren't over yet."

Can it be fixed?
If Atlantic City is to return to something resembling its former glory, it won't be solely as a gambling mecca. New Jersey Gov. Chris Christie initiated a five-year plan to restore the Atlantic City gambling industry and rebrand the city as a seaside resort. 

There are some subtle signs that pushing the city as a family destination may be working. Atlantic City Mayor Don Guardian said at a press conference last Friday that while gaming revenues are down in the city, non-gaming revenues have increased. 

During a similar downturn, Las Vegas tried the same thing. Efforts to make the gambling city a family destination failed miserably, as it was soon learned that the people looking for the unbridled debauchery of casinos, bars, pools, strip clubs, and other dens of iniquity don't really want to mix that experience with a nice family trip.

Once it became clear that Sin City and family vacations are oil and water, Las Vegas went in the other direction, embracing its tawdry reputation with the "What happens in Vegas, stays in Vegas" marketing campaign.

Atlantic City, however, was never Las Vegas. It has a boardwalk and oceanfront that make it a viable destination for families looking for fun in the sun. New Jersey's shore in general has a long tradition of being a summer destination for its own residents as well as people from surrounding states.

Re-casting A.C. as a family destination that also has casinos may be a more natural fit than it ever was in Las Vegas -- a city in the middle of a dessert created largely to serve adult needs.

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Daniel Kline has no position in any stocks mentioned. He lives about an hour from the Connecticut casinos and plays blackjack at Foxwoods five or six times a year.  The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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