It may seem strange on the surface that Caesars Entertainment (CZR +0.00%) wants to be a hotel chain like Hilton Worldwide (HLT 0.95%) or Marriott International (MAR 1.76%), but it may be the right move for a company with few growth options. Caesars is trying to license its brands to developers around the world, charging fees for brands like Caesars and Bellagio, and adding revenue in a fairly low-risk expansion plan.
The strategy is a far cry from the casino business that's been at the core of Caesars' existence for decades. But there's some sense to moving into the non-casino business if it's done right.
Image source: Caesars Entertainment.
Leveraging what Caesars already owns
The hotel business is really all about branding. Chains like Hilton and Marriott aren't profitable because they have better hotel rooms than lesser-known hotel operators, they attract customers because they're a known brand that customers trust. Caesars is betting that its brand can translate into new markets like Dubai, Mexico, and even nongaming markets in the U.S. Just hope that there's no confusion among customers expecting a casino when they walk into these nongaming resorts.
Caesars is also trying to leverage the existing systems it has from reservations to operations of the large hotels it has in Las Vegas, including the 55 million people signed up for Caesars Rewards. It's expensive and difficult to develop these systems, so any way to leverage them is a big win for Caesars Entertainment.
Check out the latest earnings call transcript for Caesars Entertainment.
Attracting new customers to Las Vegas
For Caesars, building hotels without casinos isn't just about leveraging existing costs. It's about growth as well.
Dubai is a very wealthy market where Caesars can build some loyalty and attempt to draw customers to casinos in the U.S. Mexico is an even closer market that may allow the company to attract a few customers away from the likes of MGM Resorts and Las Vegas Sands on the Las Vegas Strip. In management's eyes, spreading the brand to more locations will only help with awareness for the big resorts in Las Vegas.
The financial benefit
Any financial benefit may be gradual, but for Caesars Entertainment, it's almost pure upside. The company already has the systems and brands needed to get into the hotel business and will rely on third-party developers to own and operate the real estate. You can see below that Hilton and Marriott are generating much higher margins than Caesars, partly because of their (relatively) asset-light branding model for most of their hotel rooms.
HLT Operating Margin (TTM) data by YCharts.
If Caesars can add even a handful of properties around the world, it would be an incremental benefit.
Hotels are low risk, for now
Getting into the hotel business makes a lot of sense for Caesars right now and could help grow its gaming business in the U.S. as well. The one risk is that over the long term it could spread the company thinner and Caesars could lose control of its brand as other operators manage properties. This is why hotel brands are constantly creating new brands as older brands get stale and hotels built under older brands age. In Las Vegas, Caesars can control its brands and refresh the look of resorts as it desires. With this new hotel business, it won't have the same flexibility, which management will have to watch so they don't ruin the company's best brands worldwide.
