The Borgata Wins Over Atlantic City

Editor's Note: This is the fourth and final article of a series looking at the changing face of Atlantic City's gaming industry.

The nine-month casino partnership between MGM Mirage ( MGG) and Boyd Gaming ( BYD) has given rise to a tide of construction across the Atlantic City Boardwalk, washing away the gaming mecca's somewhat salty reputation and replacing it with a Las Vegas veneer.

The Borgata is emblematic of the trend, bringing a decidedly upscale and sophisticated product to a marketplace that has been dominated by a now-dated gold-and-glitz aesthetic. And this place is no mere casino. It is a complex where customers can find a $41 kobe beef burger at Old Homestead, see the world's most expensive and exclusive single-malt Scotch whisky vintage collection, or spend an entire day at the world class spa upstairs -- if they can get in.

Business has been strong at the Borgata since it first opened nine months ago. The 200,000 square-foot hotel and casino, which is on the marina, away from the boardwalk, has had a dramatic effect on the Atlantic City market. In February, Atlantic City's dozen casinos generated $386.3 million in revenue, up 30.1% from last year, according to the New Jersey Casino Control Commission. Credit the strong results to the Borgata, which wasn't around last year and now accounts for 14.2% of the market's total revenue.

While the jump in Atlantic City revenue stemmed from easy comparisons to a February 2003 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, which is in the marina district away from the Boardwalk, 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.

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, 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."

The Borgata Steals Share in Atlantic City
Since the Borgata opened last July, seven competitors have seen revenue drop from a year ago
Casino 2003 Owner Year-Over-Year % Revenue Change
Borgata* $266.9 million MGM/Boyd +100%
Bally's Park Place** 678.2 Caesars +28.8
Showboat 377.8 Harrah's +2.3
Atlantic City Hilton 309.4 Caesars +0.4
Harrah's Atlantic City 451.0 Harrah's No change
Caesars 519.1 Caesars -1.6
Trump Taj Mahal 517.1 Trump Hotels -3.6
Trump Plaza 318.2 Trump Hotels -6.7
Trump Marina 259.7 Trump Hotels -8.2
Tropicana 372.4 Aztar -8.5
Resorts 233.1 Colony Capital # -11.3
Sands 185.8 Greate Bay Hotel & Casino # -11.4
TOTAL $4.49 billion -- +2.4%
# -- Privately held. * -- Results since open in July 2003. ** -- Includes the purchase of the Claridge.
Sources: New Jersey Casino Control Commission, TSC research

Peanuts and Poker Chips
Old and new in Atlantic City

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 to 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 nongaming revenue, racking up half of its business from entertainment, shopping and dining. In 2003, Las Vegas booked $4.7 billion in nongaming revenue vs. just $300 million for Atlantic City. 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) adding a hotel tower prior to the Borgata's open.

"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 was pushed back after a parking garage collapsed at the end of October, killing four workers and injuring 20.
Top Table
The Ombra is one of the upscale restaurants in the Borgata

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.

While the marina is hot, 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, which includes upscale brands like Tommy Hilfiger and Guess?. And New Jersey Gov. 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 toward 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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