Jeff's back with his latest piece and this time he's examining the performance and challenges facing The Cosmopolitan.
Click through for the full text, it's a good read.
I was just at Cosmo last week for another stay. I've got a bunch of scribbles and other notes that I'm (slowly) working to turn into a piece of my own.
In November, I penned a column offering advice to different categories of Las Vegas Strip casino operators. This time I'm going to try something a little different, as I'm taking a look at how the Cosmopolitan has done during its first four-plus months of operation. I'll explain some things I think it is doing well and doing poorly and, if there are reasonable solutions, what the property could change for the better.
I have long mentioned what I see as the near-impossibility of owner Deutsche Bank making a profit on its gargantuan investment (buying and completing the property) although DB may be positioning itself to use a gigantic investment write-off on Cosmo as a way to offset taxable profits on some other deal. There is nothing Cosmopolitan's executives can do to erase DB's investment, so their focus, rightly, should be on generating operational profit.
Leaving the Cosmo's seemingly hopeless finances aside, let's take a look at its design and operations. The biggest complaints I've heard so far have been some major hotel screw-ups: Major check-in delays, failure to deliver reserved room-types, new rooms with non-functioning electronics and significant housekeeping delays and mistakes were among the many poor reviews I've read. I don't really have insightful advice on these problems other than the obvious ones: Learn from mistakes, train staff better and communicate better with customers. When things do go wrong, make it up to the customer with a speedy apology and generous compensation.
That said, Cosmo seems to be doing a great job attracting folks willing to spend more on hotel rooms, success I attribute to a few factors. First, the property has strong room product, with many rooms enjoying superior views, balconies and other features. Second, terrific marketing, public relations and word-of-mouth has fueled demand for the Cosmo's rooms. Third, the affiliation with Marriott's frequent guest program is a big advantage, as the Marriott program is one of the biggest and best in the hotel business and has no other resort alternative near the Strip. On the other hand, a fourth factor that may be boosting rates may not be a long-term positive: Restricted inventory that artificially boosts reported average daily rates. Resort executives' claims about how many rooms have been open and available don't seem to jive with anecdotal reports suggesting fewer rooms have been offered, and it wouldn't surprise me if executives have decided it is more important to maintain the appearance of a high daily room rate than to maximize short-term revenue by increasing occupancy. Limiting the number of available rooms is one way to artificially prop up rates and an illusion of quality compared with top-of-market competitors.
Terrible traffic jams into and out of the property have also been cited on several occasions, a problem Steve Wynn predicted before Cosmo opened. I'm really not sure how the problem can be fixed other than an expensive property redesign, and the hotel's long, narrow footprint and exceptionally limited supply of available space makes a change unlikely. Perhaps the property can figure ways to spread out the timing of arrivals and departures, for hotel guests and for dining and club customers, but the nature of the resort business (lots of Friday afternoon arrivals and Sunday morning departures), the Cosmopolitan's heavy emphasis on dining (many evening arrivals and departures) and its popular nightclub (lots of late-night arrivals and departures) make likely continued vehicular delays in and out of the resort.
With hotel service delivery and traffic problems out of the way, I'd like to tackle what I see is the property's biggest obstacle to operational profitability: An anemic casino floor. I think Cosmopolitan's well-documented casino troubles can be linked to a few problems. Some will improve with time but some probably will not. Several problems facing the Cosmo's gaming floor are well-known. The sluggish Las Vegas gaming economy that continues to hurt the majority of Strip casinos (especially those without the resources and inclination to be a player in the expensive, competitive, complicated and exceptionally volatile baccarat market) is a big factor and one the Cosmo's bosses can't do much about. The lack of an established casino customer base is another obvious negative.
Las Vegas casino customers generally visit once or twice a year so it will take time for Cosmopolitan to build up its database and make pitches for repeat visits. Aggressive marketing -- by advertising, offering easier credit and making generous comp offers -- is an expensive way to more quickly develop casino business, but each method has its own down side. The property has shown its ability to market its hotel, restaurants and clubs, so my advice would be to invest in strategic advertising to attract new business. Smart casino executives say that trying to generate more casino business by offering easier credit is a losing proposition, so I won't argue that Cosmo should loosen its credit standards, as long as they are near the industry norm. But I do think that generous comps are a solid way to get new players on the casino's database. Once the players have demonstrated their value -- or lack thereof -- comp offers can be continued or limited. More aggressive appeals to casino customers staying at nearby competing resorts through magazine, mobile billboard and other advertising methods (pitching bonuses for Identity-card signups, free slot play and the like) would be one smart way to quickly connect with prospective customers.
Those are the two casino problems that have been most often mentioned when Cosmo's troubles have been analyzed, but I think two other casino-related problems stand out. First is the resort's design. Because of its small footprint the property was originally designed to spread out its casino action over several floors. Experts questioned that design, noting that Las Vegas casino customers have generally preferred to stay on one floor. The property was then redesigned after Deutsche Bank took over ownership of the property, moving all of the casino action to the ground level and moving most restaurants above the casino floor.
The problem with the redesign, as I see it, is that the energy of the property's restaurants and some of its bar crowd is separate from the casino. Splitting the casino floor was a bad idea, but so is the distinct separation of the casino from most of its restaurants. Much of the property's advance public-relations blitz has been tied to its restaurants. The property's exceptionally small footprint is the culprit, as there was no way to shoe-horn a resort-size casino and most of its restaurants onto one Cosmopolitan floor. I don't think resort designers have to force customers through the casino on their way to every meal and nightclub (as Steve Wynn has demonstrated at Wynn Las Vegas and Encore) but I also don't think making customers take an elevator or escalator trip away from the casino is the best way to prompt guests' decisions to hit the tables or slots. And, to compound that problem, a Cosmo restaurant- or convention-goer can take the elevator from the parking garage or valet right to the dining and convention levels, never passing a slot machine or table game. That's not good for the casino.
And that design flaw due to the property's footprint leads to the next reason I think the Cosmo's casino under-performs: Its entire marketing appeal is to a demographic much less likely to gamble. When Cosmopolitan first opened I noticed a lot of folks in the media, particularly those who seem to enjoy fine dining, clubs and entertainment much more than the gambling side of the resort business, saying how much they liked the Cosmopolitan's design and loved having the ability to avoid the casino. I have a feeling that's true for a lot of Cosmo's "curious class" -- a lot of folks who don't really like to gamble or don't care to try. That new demographic, I believe, is a nice complement to the traditional two-fisted gambler long targeted by Las Vegas casinos, whether as a spouse of a gambler or as a significant spender on their own. Casinos that appeal to gamblers certainly also like the revenue that comes from other streams. But I think the Cosmo's appeal to the curious class doesn't attract most gamblers.
Obviously Cosmopolitan can't easily add to its footprint enough to allow it to move some of its upstairs vibe through and to its casino. Perhaps small changes can be made over time that will energize the casino floor. One change that can be made is to enhance its advertising to make Cosmo more appealing to the Vegas casino staple: The players who want to play the slots and the tables and hit it big. A Venn diagram of those demographics would probably show there isn't a big overlap of big gamblers with those in the curious class, and a single marketing message is unlikely to appeal to both. But a well-executed marketing appeal to the "gambling class" might be enough to generate some additional casino business. Although I doubt a smart marketing approach will be enough to overcome the effect of the resort's design limitations on Cosmo's casino, modest improvement may be enough to keep the property's results in the black, given the initial strength of its hotel and food and beverage operations.
-- Jeff Simpson, April 2011