Wynn Resorts Analysis
- 1. Paige Hannah BUS 465D April 24, 2009 Wynn Resorts: Can They Take a Gamble? Introduction When it comes to luxury casino destinations, Wynn Resorts, Ltd. is doing something right. An international developer, owner and operator of three luxury resorts (casino and hotel) internationally, the company has exploded onto the luxury resort scene over the past 7 years. However, despite the company’s success, the current economic recession is resulting in the entire industry taking a hit. While Wynn’s balance sheet remains fairly stable, the economic conditions in general have generated the suspicion that Wynn (NASDAQ: WYNN) will underperform at least for this quarter, if not longer. Ultimately, the problem facing Wynn is, how do we stay competitive The purpose of this paper is to show the company’s history, analyze where Wynn is today, and to identify key areas where the company can implement strategic decisions that will result in a sustainable competitive advantage. By pinpointing areas of weakness, as well as areas of opportunity, the goal is to be able to form several different strategic alternatives for Wynn to adopt, analyze the pros and cons of each, and finally suggest an alternative and implementation. Background Information Wynn Resorts, LTD was formed by former Mirage Resorts Chairman/CEO Steven Wynn on October 25, 2002, who currently serves as the Chairman of the Board and CEO of Wynn. His knowledge of the gambling and casino industry is indispensable to Wynn Resorts, as he is accredited to turning the luxury casino industry in Las Vegas into what it is today. Wynn’s mission is: “A commitment to providing an elegant environment, high‐ quality amenities, a superior level of service and distinctive attractions for our customers.”1 The company currently has operations in both Las Vegas (headquarters) and Macau Peninsula in China. Wynn Las Vegas, the company’s first development, was opened on April 28th, 2005. A year later, the company broke ground on an extension to Wynn Las Vegas, to be called Encore Suites. While the project was initially envisioned as an expansion of Wynn Las Vegas, after it opened December 22nd, 2008, the hotel and casino quickly took on a life of its own and became a full‐scale resort, and is connected to Wynn Las Vegas by a shopping arcade. Between the two resorts, there is an 18‐hole golf course, multiple restaurants, bars and nightclubs, nighttime entertainment options, an on‐site Ferrari and Maserati dealership, over 120,000 square feet of retail space, and of course all the usual casino amenities, but with a layout that is unique to Wynn Resorts. Today, the company competes closely with Bellagio, Caesar’s Palace, Luxor Hotel & Casino, Mandalay Bay Resort & Casino, The Mirage, Paris Las Vegas, New York‐ New York Hotel & Casino, Treasure Island, The Venetian, The Palazzo and Genting Highlands Resort. Despite the current conditions and having lost nearly 80% of its stock value in a year, Wynn is maintaining a strong position against its competitors (see Chart 1), not seeing their share prices dip below $14.502. As of April 24th, the closing price was $39.533. While stock valuation is not necessarily the best measure of Wynn’s
- 2. performance, in comparison to other luxury hotels and casinos, it is apparent by the nearly $20 increase in stock price from the end of March (price as of 3/31/09 was $19.971) that Wynn is not ready to crumble just yet. Wiki Information The Wiki Website for Wynn Resorts, Ltd. provides a decent overview of the company, including background information, financials, a SWOT analysis, a Porter’s Five‐ Forces analysis, and some potential strategic alternatives. Financially, Wynn Resorts, Ltd. is doing well, considering the current economic situation. In terms of liquidity, Wynn is well equipped to pay off debt obligations using current assets, even when using very conservative measures, as evidenced by a Quick Ratio of 1.9 (2008), a Cash Ratio of 2.17, and a Current Ratio of 2.13 (as of 2/24/09)1. While some of these ratios have declined from previous years, the fact that Wynn has double the current assets to pay current liabilities leaves a fair amount of wiggle room for the company. However, Wynn is experiencing diminishing profit margins, which suggests problems managing costs. From 2006 to 2007, Wynn nearly doubled their revenues, while only making a third of the previous year’s profits. It would be wise to look into cost control measures, as operating costs increased 6 percentage points over the course of 2 years. Comparatively, Wynn falls in the middle of their competitor’s, experiencing a net profit margin of 9.61% in 2007, between LVS’s ‐3.73% and MGM’s margin of 20.6% for the same year1. In addition to decreased profits, Wynn is experiencing increased debt with an almost 5 percentage point increase in the debt ratio. Wynn is relying heavily on debt to finance its operations, and while this may be short‐term debt to fund projects, it is important to understand where this reliance on debt is coming from. The SWOT analysis for Wynn reveals more about where Wynn stands organizationally. There are several key highlights for each category. In terms of Strengths, Wynn is expected to have an 8.3% revenue growth for the year, as well as the fact that they currently have over $1.7 billion in cash (as of 9/30/08)1. With a strong balance sheet and a unique approach to activities, services and overall appeal of the hotel and casino, Wynn certainly has a great deal going for them. In terms of weaknesses, much of what makes Wynn weak has to do with the current economic situation. For example, Wynn is currently experiencing a huge drop in occupancy (now at 79.7%1), likely due to the fact that it is a luxury brand, and therefore is an expense that many forego when cutting personal costs. Many of Wynn’s opportunities currently lie in new markets, such as China. With a rapidly growing middle class and the spread of luxury goods and services, China presents an entirely new set of markets for Wynn to tap into. The biggest threats for Wynn lie in competition and the economy. The gambling industry, particularly in Las Vegas, is incredibly saturated with luxury casinos and hotels. Wynn constantly faces the threat of something “new and better” coming along and debunking their position as one of the most well‐known luxury resorts on the strip. Furthermore, the economy is, again, threatening occupation of the hotel. Wynn is going to have to work to attract and retain customers, or face the threat of seeing constantly falling profits. 2
- 3. In terms of Poter’s Five Forces, it seems that the threat of new entrants is somewhat high, with easy access to suppliers and willingness of customers to switch casinos/hotels. Furthermore, in the gambling industry, the buyers have a fairly high bargaining power, while bargaining power of suppliers is relatively low, with the exception of controls by the Nevada Gambling Commission. The threat of substitutes is very strong, as even Wynn Resorts offers a variety of other leisure activities on their resort properties. This plays into the intensity of rivalry. Las Vegas is known for its casinos and luxury resorts, so the ease of finding a substitute is high, making the competition fierce. Regardless, the company and the industry remain fairly attractive1. Alternatives With the current state of the economy, Wynn Resorts, like most companies have had to take cost saving measures. Wynn has focused on many ‘efficiency initiatives.’ Rather than firing employees, Wynn is striving to keep a full‐time staff employed to avoid costs of hiring/firing, etc. These measures include reduction in employee’s salaries, reduced weekly hours for full‐time staff, and a suspension of employer‐match to company 401K plans. As a result of these initiatives, the company will save around $75 ‐ $100 million this year alone. While these initiatives will be helpful, these are more short‐term oriented solutions to current issues. My first suggested alternative is that Wynn concentrates on new markets, particularly in Asia, and even more specifically in China. The middle class is becoming bigger and bigger each day, and is expected to increase to over 700 million by 20201, with luxury spending increasing from 18% (today) to 32% by 20151. Additionally, the five‐year compound annual growth rate from 2007‐2012 is expected to continue to increase steadily to 4.4% in Asia‐Pacific1. So in the time it would take for Wynn to develop a few new resorts, the market would be ready with the disposable income available. Furthermore, gambling is growing in popularity overseas, presenting a wide range of opportunities for Wynn to expand. Competition in China is probably not incredibly stiff, but is rising so it would be wise for Wynn to establish themselves in a rapidly growing economy now. Wynn has already broken into the Chinese market with its Wynn Macau resort located on the Macau Peninsula. There are a few key issues to remember when deciding whether or not to invest in China. The first is real estate in China. While in rural areas this may be relatively inexpensive, locating the resort near cities (where the middle class is more likely to be located) is going to prove to be more challenging (lack of space) and more expensive. However, with developments in Las Vegas, the cost of real estate is likely viewed as the most important investment to make Wynn centrally located. Wynn may also have to invest a great deal of money into developing an entirely different look, feel, operations, marketing plan, etc. for future international Wynn Resort locations to accommodate for cultural differences. Furthermore, while China’s middle class is on the rise, it is hard to say how they will respond to the luxury hotel and casino industry. Chinese culture tends to be fairly simplified, and while their mindset seems to be moving westward, Wynn cannot just assume that their resorts will take off immediately with anyone other than the international business crowd. Wynn also must be cognizant of the fact that the Chinese 3
- 4. market is going to follow the American market, or at least for now. So even with a growing economy, Wynn must pay careful attention to their financing and also keep a close watch on the US markets. My next alternative is for Wynn to increase their marketing and advertising efforts on a national scale. Rather than cut the costs of marketing, Wynn as a luxury resort should be able to recognize that, particularly in this industry, exposure to the market is everything, which is the largest benefit of increased marketing and advertising efforts. Of course, there are several other benefits to increased marketing and advertising efforts that go along with exposure. Brand awareness and recognition is incredibly important, particularly in an area such as Las Vegas where competition is particularly cutthroat and substitutes are plenty for luxury hotel and casinos, which often appear to be on every corner. If brand recognition can occur on a national level the way it is with some competition (The Bellagio is often a well‐recognized name), then the status of Wynn Resorts goes up, and as a result, occupancy rates. As customers plan their vacations, if the Wynn name is on their minds, it is likely to be the hotel and casino they look into first, and thus end up booking. This would combat Wynn’s current problem of managing their properties so that both Wynn Las Vegas and Encore have customers. Wynn has the advantage of setting themselves apart in the luxury category, by providing high‐end shopping, dining, and even an on‐site Ferarri and Maserati dealership. While Wynn’s occupancy has been affected by the economy, luxury goods tend to have a fairly consistent consumer base, simply because high income individuals’ spending habits don’t tend to change as dramatically when the economy is not doing as well. Though, with the current recession being as difficult as it is, this may not necessarily hold completely true, further increasing the need to make Wynn’s name as recognizable as possible, especially for new customers. Wynn currently has a stable balance sheet and about $1.7 billion in cash1 as of September 2008, so there is cash to be invested in marketing and advertising efforts. Of course there are also drawbacks to investing in marketing and advertising, particularly in the current economic climate. Again we face the high bargaining power of buyers and the threat of substitutes, and this alternative does leave Wynn vulnerable to some large weaknesses and threats faced by the company right now. No amount of advertising or marketing can control what people spend, even those with incredibly high incomes. Steve Wynn even said himself, “hotel occupancy is back over 90% but that room rates are lower and the guests ‐‐ including the wealthiest ‐‐ are spending less freely than they did in the good times.”4 Furthermore, other companies are cutting budgets and taking less corporate trips, meaning less occupancy. Obama’s recent slam on corporate vacations in light of the economy is putting a serious damper of the amount of companies willing to publicly shell out for a Vegas vacation for executives. So, regardless of advertising, there are many spending habits that cannot be controlled. Should Wynn decide to increase advertising and marketing, they would need to be more strategic than ever in terms of what they implement and how they implement it. These measures would be very costly, and would take cash away from other possible opportunities such as hotel and casino expansion, so Wynn must allocate these funds carefully. 4
- 5. A final alternative with the current state of the economy is to essentially do nothing, keep business as usual, continuing with the current strategy of cutting certain costs. Wynn is not necessarily trying to “hold on” quite as tightly as some competitors (such as Las Vegas Sands) but the recession has had its impact on Wynn Resorts. A major benefit of riding out the recession is that once the economy settles down, they will likely be in a relatively good position to jump out ahead in the industry when the market has settled and is back on the rise. Wynn’s cash position, balance sheet and income statements all look decent for the most part, but taking the opportunity to pull back may even result in strength down the road, as they won’t necessarily be damaging their cost structure at this time. With weak expected first quarter earnings for 2009, a calm, back‐seat approach for Wynn might be the necessary opportunity to take time to breathe and re‐evaluate. Again, there are of course cons associated with any strategy. The biggest con is that this leaves Wynn incredibly vulnerable to any competitor in the industry. Wynn must keep in mind the concept of first mover advantage. By doing nothing, Wynn could lose out to competitors who, despite the economy, choose to surge ahead and make bold moves. This could, unfortunately, give the competition the upper hand and provide a competitive advantage that would belong to Wynn had they chosen to move first. Wynn has a good thing going for them right now, as they are staying in the middle of the competition and still seeing positive returns, so one might question why ruin a good thing? What’s more is that with a potential loss of competitive advantage and a lack of exposure to the market (due to staying stagnant), Wynn risks losing its customer base. In Las Vegas in particular, it is often about the newer, better, flashier place to be, and if Wynn doesn’t keep up, they will see their occupancy rates decline significantly. 5
- 6. Chart 1: Wynn’s Stock 1‐year Stock Performance Compared to Gambling Industry3: Sources: 1. http://elonstratwinnresorts.wetpaint.com/ 2. http://seekingalpha.com/article/131233‐casinos‐reassure‐markets‐they‐re‐ here‐to‐stay 3. http://money.cnn.com/quote/chart/chart.html?pg=ch&symb=WYNN&time=1 yr&freq=1dy&charts=0&comp=&compidx=aaaaa%7E0&ind_compind=8677%7E 3234821&uf=0&lf=1&ma=0&maval=60 4. http://online.barrons.com/article/SB124101770125568887.html?mod=google news_barrons 6