First of all, let me say that Atlantic City will always have a special place in my heart. I grew up right near the Jersey Shore, and played my first hand of blackjack at Caesars Atlantic City on my 21st birthday some time ago.
However, the city has gone downhill quite a bit since then, and is currently having one of the worst years in its history. In fact, with the recently announced closure of the Trump Taj Mahal, five of the city's casinos will have shut their doors forever by the end of 2014.
So, why is Atlantic City doing so poorly while Las Vegas is thriving? Here are three business lessons that Atlantic City can learn from sin city that can help it turn things around.
Diversification is everything
The most basic reason Las Vegas is so much more successful is that the city as a whole does something so well – diversification.
Atlantic City got a little too comfortable being the only gambling mecca on the east coast and became too reliant on casinos to draw tourists to the city. And this worked great during the 1980's and 1990's when it was the only place to gamble in the area.
The problem is that nowadays, there are plenty of places to gamble. Atlantic City was in trouble the second they broke ground on casinos in Philadelphia and Connecticut. Now, there is a casino within a few hours drive of most places in the country.
On the other hand, Las Vegas has a lot more going for it. The city features world-class entertainment, sporting events, conventions, and a lot more "playtime" activities to do.
Sure, Atlantic City has some of this, but the shows and other activities are designed as an afterthought to gaming. In Las Vegas, it's the other way around. It's a fun, dynamic vacation town that just happens to have a bunch of casinos.
For example, 7 of the 10 highest-grossing nightclubs in the U.S. are in Vegas. XS Nightclub at Wynn's Encore alone brought in about $95 million in revenue last year. To put this in perspective, consider that the four highest grossing nightclubs in Las Vegas produced more in revenue last year (about $270 million) than the operating profits of all 12 Atlantic City casinos combined.
That's what I mean by the city not being dependent on gambling revenue for success.
What about the off season?
Sure, many businesses have a "peak season". For example, retailers generally see their highest sales during the holiday shopping season. However, in order to be successful, most businesses need to figure out how to earn a profit during the rest of the year.
In the case of Atlantic City, the peak season is the summer, and that will never change. People from New Jersey, Pennsylvania, and New York flock to the Jersey Shore in droves during the summer. Atlantic City's summer business will take care of itself, as long as the beach and boardwalk are there.
It's the other 9 months out of the year that are the problem. Aside from just gambling, the city needs to give people a reason to head to the beach when it's cold outside – no easy task.
For those readers who have never been to Las Vegas, despite what many people believe, it's not hot all year round. In fact, as I'm writing this, the temperature in Las Vegas is a chilly 45 degrees. And tomorrow's high is barely expected to reach 60.
However, although people aren't going to Vegas to sit by the pool and work on their tan right now, there are a lot of other things drawing people to the city. For instance, the two largest conventions of the year, the SEMA show and the Consumer Electronics Show are held during the colder months, and these draw 140,000 and 163,000 people, respectively, to the city, filling hotel rooms and the city's businesses.
Plus, Las Vegas has legalized sports betting, and whether or not you agree with it, the most popular sporting events for gamblers (Super Bowl and March Madness) take place during the winter months.
Simply put, Las Vegas gives people a reason to visit even when it's cold outside. If Atlantic City can successfully do the same, they could go from a summer resort town to a year-round tourist destination.
Too much of a good thing isn't so good
By the end of the year, the Atlantic City casino market will be made up of (in no particular order) Caesars, Bally's, Tropicana, Harrah's, Golden Nugget, The Borgata, and Resorts. And that's probably plenty, especially if the city starts to shift its attention away from gambling.
One of the worst things you can do in any business is to saturate the market. Many businesses learned this all too well after expanding rapidly before the financial crisis. And Atlantic City is learning this lesson the hard way now.
Las Vegas gets about 40 million visitors per year, and has 60 casinos between the strip and downtown areas. That's a ratio of about 667,000 visitors per casino per year.
Atlantic City gets about 27 million visits, but just 4-5 million unique visitors per year (many visitors come for the day), and started 2014 with 12 casinos. That's a much lower ratio of 417,000 visitors per casino (using the higher estimate). In other words, the market had become oversaturated, and the appearance of casinos in surrounding metropolitan areas just made the situation worse.
So, the market has naturally unsaturated itself. We don't know what will come of the closed casino properties, but let's hope the city and its businesspeople have learned a lesson and use them for non-gaming purposes. Seven casinos are probably enough for Atlantic City.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool is short Caesars Entertainment. 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.