Borgata Wins Over Atlantic City

Call it the Borgata effect.

The eight-month-old casino partnership between MGM Mirage ( MGG) and Boyd Gaming ( BYD), has given rise to a tide of construction across the Atlantic City boardwalk that is washing away the gaming mecca's somewhat salty reputation and sparking a return to its resort-community roots.

The 200,000-square-foot hotel and casino has had a dramatic effect on Atlantic City since opening in July 2003 and is now boosting results across the boardwalk. In February, Atlantic City's dozen casinos generated $386.3 million in revenue, up 30.1% from a year earlier, according to the New Jersey Casino Control Commission. Credit the strong results to the Borgata, which wasn't around last year but which now accounts for 14.2% of the market's total revenue.

While the jump in Atlantic City revenue stemmed from easy comparisons with a February 2003 that was plagued by two blizzards, the whole market is showing signs of a comeback. Excluding the Borgata, revenue at casinos open a year ago was up 14% in February, the first same-store increase since the Borgata opened in July 2003.

Even more promising: The Borgata's results stayed strong over the traditionally challenging winter, a signal that the pop in business may be sustainable. And the casino isn't just lifting the market, it's dominating it, stealing market share from rivals through aggressive promotion. To entice newcomers to check out the casino, the Borgata gives away $1,000 in slot tokens every 15 minutes from noon until midnight.

"Borgata placed second among the 12 casinos in terms of absolute total gaming revenue for the sixth month in a row, trailing the much larger Bally's, third in terms of absolute slot revenue, and first in absolute table-game revenue for the seventh straight month," said Michael Reitbrock, gaming analyst for Citigroup Smith Barney, in a note.


A Nice Place to Gamble...
Atlantic City has held its own against Las Vegas in terms of gaming revenue. Now Atlantic City is looking to boost non-gaming revenue.
Year Atlantic City Las Vegas Strip
Total Gaming Revenue* YOY % Change Total Gaming Revenue* YOY % Change
1997 $3.9 billion 2.4% $3.8 billion 6.4%
1998 4.0 3.2 3.8 0.1
1999 4.2 3.3 4.5 17.7
2000 4.3 3.3 4.8 7.0
2001 4.3 0.1 4.7 -2.1
2002 4.4 1.8 4.7 -1.0
2003 4.5 2.4 4.8 2.3
* -- Numbers rounded. Source: Nevada Gaming Control Board, New Jersey Casino Control Commission

The splashy debut of the Borgata, the first new casino to hit Atlantic City since the Trump Taj Mahal opened its doors in 1990, highlights the difference between the gaming center's past, which catered to an older crowd arriving on charter buses, and its future, which is targeted at a younger crowd willing to spend money away from the gaming floor.

"Atlantic City got the reputation from the bus traffic coming in, but the Borgata is able to survive without it," said Linda Kassekert, chair of the New Jersey Casino Control Commission. "There was that history based on the Frank Sinatras and the guys that frequented in the past, but things are changing now. The Borgata is a much younger crowd, and that's helping."

While Atlantic City has always been big with gamblers, with annual revenue growth around 3% over the last decade, the lack of new glitz has left it somewhat moribund compared with the Las Vegas Strip. Since 1997, in terms of total gaming revenue, Atlantic City's 11 casinos have trailed the 40-plus casinos on the Strip, but not by a wide margin. In 2003, Atlantic City racked up $4.5 billion in gaming wins to the Strip's $4.8 billion.

But Las Vegas trumps Atlantic City in terms of non-gaming revenue, racking up more than half of its business from entertainment, shopping and dining. The Atlantic City market, however, generates between 10% and 20% of revenue from non-gaming business. Furthermore, there aren't enough hotel rooms in Atlantic City, which has 105,000 fewer rooms than the Strip. As a result, hotels are often at 90% occupancy even in off-peak season.

Business at the Borgata is so good that the casino and hotel operator said it has been turning away business. And while Borgata's parent companies have plans to expand their individual empires, with Boyd's announcing a deal to buy Coast Casinos and MGM Mirage moving into the U.K. market, they're not neglecting the Borgata. The companies plan a 500,000-square-foot expansion of the casino on 95 adjacent acres that MGM owns.

The Borgata boom is only now being felt. From 1978, when gambling was introduced in Atlantic City, until 2003, a total of $8 billion has been invested in the market. Over the next four years alone, at least $2 billion in investment is expected. A new wave of construction is already under way, with Harrah's Entertainment ( HET) and Showboat adding hotel towers over the last two years.

"The nature of the casino industry is that you have to stay new and fresh and cutting edge in order to retain and gain the interest of the customer," said Bradford Smith, principal of International Gaming Consultant Services. "The Borgata was the shining new kid on the block, and the other casinos have to keep up with their neighbor. Now there's more pressure, and you're seeing the building start."

Indeed, in September, the Tropicana Casino and Resort will open The Quarter, a $245 million expansion that will add 502 rooms and 200,000 square feet of entertainment, dining and retail space. The Quarter was originally scheduled to open in March, but the date was pushed back after a parking garage collapsed at the end of October, killing four workers and injuring 20.

Caesars Entertainment ( CZR) is converting the Million Dollar Pier into The Pier at Caesars, an entertainment, dining and retail destination scheduled to open next year. The casino operator also plans to build another hotel tower and could further expand in Atlantic City, where it owns parcels of land in and around the boardwalk.

Even off the boardwalk, the momentum is building. Another wing of The Walk, a $76 million retail outlet shopping center in midtown, will open this spring, adding more stores to the 70 that opened last summer; these will include upscale brands such as Tommy Hilfiger and Guess? And New Jersey Governor James McGreevey wants to provide $60 million in aid for the Casino Reinvestment Development Authority to fuel hotel construction.

"There is a lot of building done down here. There's a big move towards retail, dining and entertainment venues," said Kassekert. "We have so much more to offer. We have the ocean, people can come in and stay overnight. Atlantic City is becoming more of an overall destination location, which is what it was in the past, even before gambling."

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