To: James J. Murren From: Date: November 18, 2013 Subject: Issues of MGM International Resorts I am writing this letter in order to address the slow recovery of your company. It has come to my attention that your company, MGM International Resorts, is facing some major issues as the gaming and hospitality industry struggles to recover. In this letter I plan to address the industries problems, and the specific issues that your company is facing.
One of the major issues facing MGM International Resorts is that it is that the industry has a lot of overcapacity as demand has dropped from pre-recessionary evels when many big projects have been planned. This is evidenced by your company’s ambitious pre-recession project CityCenter, the largest private development project in United States history. CityCenter ended up opening to little fanfare. The biggest sources of revenue in the industry were conventions. Due to the economic downturn in 2008, revenues from Conventions have decreased dramatically and have not fully recovered.
Trade shows, associations and corporations traditionally paid a premium to meet in Las Vegas. Now with fewer organizations meet in Las Vegas, they can now negotiate lower prices. There are now increased leisure travelers going to Las Vegas to fill discounted rooms but does not help you increase revenue much as they do not like to spend money on your high end shopping and dining venues. Americans are also deciding more carefully spend their money preferring “staycations” in order to save money on increasing airfares and travel costs. This is mainly due to the decrease in discretionary spending of 43 percent from December 2007 to January 2011.
The road to recovery from the start of the economic recession for the industry is slower than predicted. Your company also aces strong competition from competitors such as Wynn Resorts and Las Vegas Sands who have managed to fare in the recession substantially better. MGM Resorts International’s financial statements are not very good relative to your competitors. Your company had a degradation of financials compared to your competitors whom of which fared the recession much better. Your company is highly leveraged with net debt to EBITDA of 1 1. 5 times. Boyd, Las Vegas Sands have lower debt leveraging at 8. x, 3. 3x, 3. 4x, and 1 . 9x respectively. You are also not as widely diversified in regional American markets such as in the Northeast. Your company has recently lost money posting a net loss of 1,437. 4 million in 2010. I will first analyze the health of the gaming and hospitality industry in Las Vegas in which you compete using Porter’s Five Forces of Competition Model. The industry faces a lot of substitutes which your customers flock to. There is online gambling. This may keep people from flocking to casinos to gamble as they can conveniently do it at home.
There are also closer example of this would be Empire City Casino in Yonkers, NY. It is only half an hour way from New York City and very convenient for those in the area who would Just like to gamble for a night and return home. You do not face a very large threat from new entrants as the capital requirements to enter the gaming and hospitality industry are very high. Customers are able to easily switch from staying on your properties to another company’s property. Your company also possesses a wide variety of products that are differentiated. That being said, Industry Rivalry between you and your competitors are very high.
All companies in the industry are on fairly qual ground ever since the recession. The costs to exit this industry are also very high. Customers again have very low switching costs and may switch between different properties as they see fit and the large excess in capacity in the industry means that you and all your competitors are cutting prices on rooms and services in order to attract business. The industrys suppliers of hospitality related supplies, such as food bed sheet and soap, and casino/gaming specific supplies, such as slot machines and thousands of decks of cards, have very weak bargaining power.
The ew large companies within the gaming and hospitality industry have the bargaining power with when it comes to its two supplier lines as there are many of these suppliers to buy from while only a few large companies that are willing to buy. The ability to use a company’s size to negotiate price and length of contracts for expensive high luxury furnishings and exclusive rights to a show or celebrity chef also gives the gaming and hospitality industry strength. While bargaining power of the suppliers is weak, the bargaining power of buyers is very strong.
Customers have ery low switching costs and again the large excess in capacity in the industry means that you and all your competitors are cutting prices on rooms and services in order to attract business. Conventions, which are a large part of revenue have been on the downturn compared to capacity, again forcing prices downward. Buyers in the industry are also very price sensitive with many opting to take “staycations” where vacationers enjoy their time off closer to home. All of these forces add up to an industry that is relatively weak and recovering very slowly.
Using the growth-share nalysis, your company is positioned as a cash cow which is very good. Your company has high market share in a slow growing industry. The company should worry though as it is close to being a dog of the industry as it has a lot of debt from ill-timed large projects such as CityCenter and must worry about other companies stealing market share as they are recovering faster. The industry is very capital intensive which means a lot of revenue is being reinvested back into the business. I will now analyze your company through SWOT Analysis. Your company has quite a few strengths that ill help your company into the future.
Your company’s large size gives it the upper hand in negotiating the best prices from its suppliers. It is very advantageous that your company caters to a wide range of customers from the high-end consumers with resorts such as the Bellagio offering exclusive products to the value-minded consumers with Circus Circus. Your ability to provide superior customer service by recruiting, training and retaining the best most motivated individuals is very valuable in your company. Your marketing and sales activities are another strong suit which compliments your services.