396 STRATEGIC MANAGEMENT CASES. MyManagementLab® For additional assurance of learning questions which prove you understand and are able to apply the strategic concepts in this case, go to the assignment ‘section of your MyLab. Wynn Resorts Limited, 2015 ‘www.wynnresorts.com, WYNN Headquartered in Paradise, Nevada, Wynn Resorts is a large upscale casino with pr Las Vegas and Macau. Wynn’s properties offer many high-end gaming options and wordgig4 entertainment through shows, shopping, spas, dining, and more. Wynn’s Las Vegas include Wynn and Encore, which offer nightclubs, a beach club, Ferrari and Maserati deul ships, and even a golf course. Wynn Resorts has 4,748 hotel rooms in Las Vegas and 1,003 oom, ‘in Macau. Wynn Macau (located on an island. just off the coast of Hong Kong) has an ag with the Chinese government to use 51 acres of land in the Cotai area of Macau to build an gy. clusive $4 billion resort. Wynn expects the project to be completed inthe frst half of 2016. company owns 72 percent of its Chinese operations and employs 16,500. However, gambling revenue in Macau fell 2.6 percent in 2014 to 351.5 billion patacas ($44 billion USD), the firy decline in Macau since 2002, December 2014 gambling revenues in Macau dropped a recor! 3 percent from a year earlier to 23.29 billion patacas. Wynn generates much ofits revenue fom premium customers who gamble on credit. Its lax credit policy leaves the firm at a higher cre, risk than rival firms. All Macau companies are struggling, primarily due to a crackdown on cr. ruption in China and that country’s tighter visa policies, which undermined gambling in Macau, Copyright by Fred David Books LLC. www, strategyclub.com (Written by Forest R. David) History ‘Wynn Resorts traces its history back to 2002 when Mr. Steve Wynn and Japanese billone Kazuo Okada agreed to terms on the Wynn Resort property in Las Vegas. The two purchased the Desert Inn for $270 million and had its IPO the same year, a full three years before the Wym opened its doors for business. Three other properties followed with Wynn Macau, Encor is Las Vegas, and the Encore in Macau opening their doors in 2006, 2009, and 2010, respectively ‘The Wynn Macau property's construction began over a year before the Wynn Las Vegas opened for business. In September 2014, the Massachusetts Gaming Commission voted to approve Wyma Resorts’ proposed $1.6 billion casino to be located in Everett, Massachusetts, just north of Boson For Q3 of 2014, Wynn's revenues from its Las Vegas operations increased 9 percent yea over-year to $427.8 million, due to higher casino and room revenues. Casino revenues increased 10.5 percent from the prior-year period, while room revenues were up 7.2 percent to $1025 million. Wynn reports its Macau table games results under two categories: the VIP segment ani the mass market segment. For Q3 of 2014, Wynn Macau’s revenues declined 5.6 percent year over-year to $942.3 million, owing to a decline in revenues generated from the VIP markt. ‘Wynn's overall Q3 2014 results were good, so the company increased its quarterly dividend by 20 percent, and approved an additional cash dividend of $1.00 per share. Internal Issues ‘Wynn's organizational structure is found in Exhibit 1. The company has two primary reporting segments: Las Vegas and Macau. There is substantial duplication of titles in the firm’s structure, including two different executives with the title president of Wynn Macau. Top management is ‘well compensated, with Steven Wynn's reported annual salary being $19 million, and the tp other executives’ salary plus options ranging between $5 and $9 million. Vision/Mission Tie authors could not find either a vision or mission statement for Wynn Resorts, Strategy CEO Steve Wynn has excellent expertise in developing and operating high-quality casise properties. Wynn employees are thoroughly trained to provide guests with the luxury vice they expect. An extensive reward system also attracts and keeps guests returning. T®IT 1. Wynn Resorts’ Organizational Structure ‘ I J I I Sepien >) (es En Soe) (aban) (Baw) (ormrcl) (Teper Gomey-cniet| | Sizomp- | | Sian | | Heeson- | | Gamo | | Conete- |] reeneand | | O:Bater~ Fiancal | [Eeccame | | Exeatve | | Soiorvce| | Scuorvice | | Senorvice |] OO, whan | | Exeanve vie Ofiersenor | | VP wn Preident | | Peet” | | Peden | | Deena | | Present of VieePraent | Jandchiet | | Gone | | anacro, | | sa mice, || Dewrmene | | Archtcere, Snahenorr | "Amine | Countad | | Wymn | | tO.wien | | ne Wyong Ofer sewary | [tues | | Pace] | Maes & berclopment ue ‘ind Chen President, Wynn Intemational Marketing, Lt Source: Based on company documents. ‘S102 ‘O3LIWM SLUOS3Y NAM « » 3Sv9 se398 STRATEGIC MANAGEMENT CASES EXHIBIT 2 Wynn's 2014 Operat ‘Source: Based on information from Wynn press release 2015. ‘company is actively looking to build or acquire properties in new markets. In 2013, te firm won a bidding competition for the rights to build a $1.6 billion casino near Bosia, Massachusetts, set to open in 2017. Wynn won that bid by a 3-1 vote over the Mohezan Sa Regulators cited better-paying jobs, and Wynn’s plans to clean up an industrial land develop ‘ment site nearby, as reasons for awarding Wynn the contract. Interestingly, as the $2 bili new, oceanfront Revel casino in Atlantic City, New Jersey, was auctioned off in 2014 fr roughly $200 million, Steve Wynn stood on the sidelines, apparently having no confident the future of Atlantic City as a gaming destination. But in general, Wynn is looking exp geographically. Segment Data Wynn operates in two business segments—Macau and Las Vegas—as revealed in Exits! and 3. Note that Wynn derives about three times more revenue from Macau than Las Vegas Wy has a 20-year lease agreement with the Macau government that runs through 2022. Cures there are two Wynn properties in Macau with a third to be completed in 2016. The propess include eight restaurants, a full array of shops, spa, poker pit, high-end private gambling sks as well as table games and slots. Exhibit 3 reveals that Wynn's Macau properties have date table games of the two Las Vegas properties, but far fewer slots. Macau properties accout it about 17 percent of total rooms, yet Macau accounted for 61 percent of revenues in 2013, ing a higher end customer on average visiting the Macau properties. ‘As Exhibit 3 reveals, Las Vegas properties focus more on slot than Macau propeis? generate revenues, Las Vegas based properties, Wynn and Encore, have a total of 3 night 34 restaurants, a beach club, 18-hole golf course, 96,000 square feet of high-end shops 2! Ferrari and Maserati dealership. Not revealed in Exhibit 3 are the data from 2013, butts portant to note that the average number of Macau slot machines declined 21 percent from to 679, Note in Exhibit 4 that about 79 percent of all Wynn revenues are derived from gam rather than rooms and entertainment. EXHIBIT 3 Wynn's Breakdown of Casino Properties ‘Average Number Average Number of Table Games of Slots Macau 461 618 Las Vegas 232 1.858 ‘Source: Based on information from the Wynn 2014 Annual Report, p. 4.Eee CASE 4 » WYNN RESORTS LIMITED, 2015 EXHIBIT 4 Product Revenues (in millions of USD) 201420132012 Casino S274 S490 $4,035 Rooms saa 492 480 Entertainment and retail 401 419 47 Food and beverage os $87 S88 {Promotional allowances) 369) G67) 366) ‘Total revenues 434 1 sss ‘Source: Based on information from Wynn press release, 2015. Finance ‘Wynn Resorts is engaged in developing the Wynn Palace Project on the Cotai land in Macau, The opening of this new casino was scheduled ahead of the Chinese New Year in February 2016, however, it has been reportedly postponed owing to a delay in timing of permits and will open sometime later in the first half of 2016. Currently, the company expects the project to cost around ‘$4.1 billion. The company spent around $428.7 million on the Cotai project in the quarter. For Q4 of 2014, Wynn Resorts’ revenues from Las Vegas operations declined 5.8 percent year over year to $376.8 million due to a decline in casino revenues. Net casino revenues fell 155 percent from the prior-year period to $171.0 million. Table games win percentage was 24 percent. However, room revenues were up 6.3 percent to $95.5 million, due to improved aver- age daily rate and occupancy rate. During Q4 2014, RevPAR was up 7.2 percent. For all of 2014, Wynn's earnings per share were $7.58, down 0.8 percent year over year. Revenues were $5.43 billion, down 3.3 percent year over year. Wynn’s recent income statement is provided in Exhibit 5, and the company’s balance sheet is provided in Exhibit 6. Competitors . Wynn competes with Caesars Entertainment and MGM Resorts in Las Vegas, and competes with, Las Vegas Sands in both Las Vegas and Macau. Caesars and MGM have hotels around the United States and are larger than Wynn, based on total U.S. revenues. Growth expected in the U.S. gam- ing industry is projected to be close to 2 percent from 2015 to 2019, a slight increase from the 15 percent growth rate from 2010 to 2014. Competition is fierce, however—not only between rival firms but also between local and state governments, and with online gaming companies. In 2014 alone, 4 casinos shut down in Atlantic City, partly blamed for new casinos opening in neighboring Philadelphia, Baltimore, and West Virginia, drastically reducing the number of per- sons driving to Atlantic City to gamble. Especially in areas with many casinos, like Las Vegas or Atlantic City, casino companies are have to continually update their properties, amenities, and games. New slot machines that are cashless, larger gambling promotions, larger jackpot prizes, and other strategies are being used to EXHIBIT 5 Wynn's Income Statement (in millions of USD) Report Date December 31, 2014 December 31, 2013 Revenues 95.433 $5,620 Operating expenses 4159 434 EBIT 1274 1.286 Interest 315 299 EBT 959 987 Tax 4 18 Other items 23) 240) Net income 732 ns ‘Source: Based on Wynn's 2014 Annual Report p. 70, and Yahoo Finance. 399400 STRATEGIC MANAGEMENT CASES ince Sheet (in millions of USD) December 31, December 31, Report Date 2014 2013 Assets Cash and equivalents 2422 $2,609 Accounts receivable 238 22 Inventories n 75 Other current assets 50 a ‘Assets held forsale = Total current assets 2,782 2,969 Property, plan, & equipment 5,856 4.934 Goodwiil - - Intangible assets 12 31 Other assets 312 443 Total assets 9,062 8377 Liabilities Short-term debt - SL ‘Accounts payable 303 23 Taxes : 137 21 Other current abilities 873 970 ‘Total current iaiftes 1313 1455 Long-term debt 7.345 6.588 Deferred income taxes 25 4 Other liabilities 169 188 Minority interest 239 317 Total liabilities 9,091 8,562 Common stock 1 1 Retained eamings 164 6 ‘Treasury stock (at4sy (1,143) Paid in capital and other 951 891 Total equity 29) (185) ‘Total liabilities & equity 9,062 8377 Source: Based on Wynn's 2014 Annual Report, p. 69, and Yahoo Finance. attract customers. The casino hotel industry also faces competition from external players suchas racetracks and riverboats. Although American citizens can still easily gamble online, the United States has legislated against such operations, though many of these casinos are often based inti Caribbean, Lotteries are also a competitor in the industry. Exhibit 7 reveals that both Caesars and MGM reported negative net income and bavesgni- cantly lower market caps than Wynn. Caesars Entertainment Corporation (CZR) Headquartered in Las Vegas, Caesars is one of the largest casino companies in the word wid brand names including Harrah's, Caesars, Bally's, Rio, and Horseshoe. The firm employs 70,0) worldwide, with notable properties in Las Vegas, Atlantic City, New Orleans, Mississippi, s- eral other states, and the London Clubs Intemational family of casinos. The company operas in three main geographic segments: (1) Las Vegas, accounting for 40 percent of domestic cenues, 2) Atlantic City, and (3) an “Other,” focusing on properties in states mostly bordering Mississippi River. Caesars also manages several Native American casifios. In total, Caesars controls abot 13 percent of the total U.S. market share and reported worldwide revenues in Q3 of 2014 w% 1.395 billion, up 0.3 percent from the prior year-over-year period. However, the company’s‘CASE 4 + WYNN RESORTS LnaTED, 2015 EXHIBIT 7 A Comparative Analysis of Wynn versus Rival Firms Wynn Las Vegas Sands Caesars = MGM ‘# Employees 16,800 48,500 68,000 50,000 $ Net Income 732M 2,306 M (2.948M) (156M) $ Revenue 5433 13.770M 8.560M 9,809 M $ Revenue/Employee 323,000 284,000 125,882 196,180 SEPS Ratio 718 352 25) 030 '$ Market Cap. 16B 48B 15B__106B ‘Source: Based on various company reports. income for that Q3 was negative $908 million, compared to a negative $761 million the prior year-over-year period. Caesars is having to spend excessively to modernize outdated Las Vegas properties. As of October 2014, Caesars and its lenders were negotiating terms to provide a path for Caesars to de-leverage and more effectively pay off its debt. MGM Resorts International (MGM) MGM is one of the largest hotel casino corporations in the world, with an 11 percent market, share in the United States. Originally named MGM Mirage, the firm changed its name to MGM Resorts International in 2010 to better reflect its strategy of international expansion. MGM pri- marily still operates in Las Vegas, but also has properties along the Mississippi Gulf Coast, in Detroit, and in Macau. Unlike Caesars, which has recently been remodeling many of its proper- ties, MGM is known for continually investing in properties to keep them up-to-date. The firm eams around 43 percent of sales from gaming activities and 57 percent from hotels, food, and entertainment, In late 2014, MGM was allowed to reclaim its 50 percent stake in the Atlantic -based Borgata, after its share was held in a trust since 2010 awaiting a potential buyer. To diversify its assets, MGM recently purchased a $400 million stake for a 55 percent share in Mark Burnett's Ventures. Mr. Burnett has produced such television shows as Survivor, The Bible, Shark Tank, and The Apprentice, among others. Las Vegas Sands (LVS) The Las Vegas Sands accounts for about 4 percent of the hotel casino industry in the United States and has an overall profile most similar to the Wynn than any other casino corporations. Top prop- erties of the Sands include The Venetian, The Palazzo, and The Sands casinos in Las Vegas. Total Vegas properties inclyde 7,100 rooms and over 225,000 square feet of gaming space. In Macau, the Las Vegas Sands operates the Sands Macau, the Venetian Macau, and the Four Seasons Macau. ‘The Sands reported 2013 revenues of $13.8 billion, up 45 percent from two years prior. Interestingly, the Las Vegas Sands was in discussion with the government in Spain to build a “EuroVegas” project for $30 billion in Madrid, but it was cancelled in December 2013 due to disagreements between the Spanish government and the Sands. The Sands also recently paid $47 nillion to the U.S. government to settle a money-laundering case. Even though the settlement is not large in relation to the Sands finances, the settlement has caused the Sands to work diligently to strengthen their compliance globally. External Issues Internet Gaming and Poker Online gambling is currently legal in Nevada, Delaware, New Jersey, and Washington, DC. The industry is expected to generate annual revenues of $10 billion by 2017. The market is primarily focused on 25- to 35-year-old customers. To facilitate entering the market, the top firms, such as MGM and Caesars, have acquired online gaming firms that produce apps for use on phones and tablets. Competitors such as PokerStars, Full Tilt Poker, and Absolute Poker pose a risk to traditional casinos with their online operations. However, in 2011, the United States Federal Government shut the sites down on the basis of fraud. But in 2012, a U.S. judge in New York ruled that Texas Holdem Poker is more of a game of skill than luck, and running Texas Holdem 401402 STRATEGIC MANAGEMENT CASES ly legally applie; USS. gambling laws. The ruling onl applies pac ‘and could open the door for possibly on- physical poker locations. Poker games technically does not violate any for the judge's district, but it does serve as & Tine gambling returning or even smaller “mom-and-pop approval rate should help the industry moving forward. Wynn relies on middle-class Americans, ‘but targets upscale clients—more so than any rival firm. Outside the United States, there is fierce ‘competition for high-end customers in Macau, Dubai, and Singapore. With the high-end market in Macau, table games tend to be the largest driver of casino operations, exceeding all other forms of gaming, as well as revenue from food, rooms, and other entertainment provided. The ‘annual growth rates from Asia's middle-class customers have exceeded U.S. growth rates in each year from 2010 to 2014. However, high-end customers remain a top priority, even in the US. market with 30 percent of U.S. industrywide revenue coming from households with $150,000 or ‘more in income. With household incomes between $35,000 to $99,000, middle-class customers ‘comprise about 46 percent of total U.S. casino revenues. High-stakes gamblers comprise about 22 percent of worldwide casino revenues. ‘The first half of 2014 saw revenues 5 percent below revenues for the same prior period in Macau, but revenues on the Las Vegas strip were up 4 percent from the first half of 2013 to the first half of 2014. A revitalization of the Las Vegas strip may be near, as casinos are updating their offerings and Australian Billionaire James Packer announced a new 34-acre project along the Las Vegas strip tobe finished in 2018, In the United States, slot machines, poker machines, and various other gaming machines account for 55 percent of industrywide revenue, while table games account for 15 percent and accommodations account for 11 percent of industrywide revenues. However, the percentages depend on location. In Towa and South Dakota, for example, slot revenues can be in excess of 90 percent of casino revenues, because most of these customers are drive-in folks with a limited budget, thereby making slots an attractive choice for their entertainment dollars. The Las Vegas strip now receives over 60 percent ofits revenue from nongaming activities such as food, drinks, shopping, and shows. Many customers in Las Vegas visit for reasons other than primarily to gamble. There is also a growing trend among younger customers to favor table games over slots. Younger customers also value nongaming amenities like bars, clubs, shopping, and food. According to the American Gaming Association, about 34 percent of Americans visit casinos annually. Industrywide Revenue Volatility The hotel casino industry has relatively stable revenues, regardless of the economy. Caesars, for example, experienced revenue increases of 6 percent between 2011 and 2043, and Wynn Resorts revenues increased 7 percent over the same time period. Overall, the U.S. casino hotel market saw annual revenue increases of only 0.5 percent between 2010 and 2014. Several reasons cited as to why revenues are relatively stable include (1) high-stakes gamblers are not affected by the ‘economy to the same degree as smaller-stakes gamblers, (2) people with a gambling problem are likely to gamble regardless, and (3) many tourists still desire to gamble while on vacation, Gambling Regulations The casino industry is a highly regulated industry in the United States as well as internationally. States have jurisdiction in the country to regulate or even prohibit the practice. Currently, the only two states with gambling allowed statewide are Nevada and Louisiana. In total, 17 American states have legally operating casinos, including states with riverboat casinos. Kansas recently opened 4 casinos operated by the Kansas Lottery, and Massachusetts has recently accepted the bid from Wynn Resorts to open a casino near Boston. The high degree of regulation is a burden for firms like Wynn, MGM, and Caesars from expanding into other possible gaming locations such as Myrtle Beach, South Carolina, where casinos are prohibited. ‘Nevada accounts for about 50 percent of casino hotels in the United States and ears neatly : 30 percent of U.S. casino revenues. Las Vegas first opened casinos in the 1930s and enjoyed nearly 50 years of uncontested market space, until Atlantic City's first casino in 1978. In be last 40 years however, many states have added casinos, including American Indian reseratio®.CASE4 + Wrimnesoms.uureo ars 408 putting increased pressure on Las Vegas in addition to large international markets like Dubai, ‘Macau, and Singapore. For example, Pennsylvania now accounts for 8 percent of total US. casino revenues, mostly from slot machines, and future projections predict New York and Massachusetts as significant players as casinos are set to soon open in these states. Florida has casinos, as does Mississippi and North Carolina. Macau Developments ‘Macau overtook the Las Vegas Strip in 2006 as the world’s largest casino market. Macau gaming revenues increases were 58, 42, 13, and 19 percent from 2010 to 2013, respectively. However, in 2014, Macau revenues declined by 2 percent. The long-term outlook for Macau is positive because of the growing middle class in China, but the slowdown has some industry experts point- ing to Las Vegas as a new profit driver. Nevertheless, casino revenues in Macau in 2013 were seven times that of the Las Vegas strip. Part of the slowdown in Macau during 2014 was blamed ona Chinese crackdown on corruption on the mainland, as well as pro-democracy political un- restin Hong Kong. Macau is a one-hour ferry ride from Hong Kong. Also dragging down Macau casinos are tighter visa policies for Chinese people traveling to Macau, increased oversight on UnionPay cards many gamblers use to access funds in Macau, new smoking restrictions, and (China's crackdown on corruption has prompted high-rollers to shy away from Macau. In 2014, Macau experienced over a 6 percent decline in revenue from the same time period in 2013. Macau has heavily relied on junkets to bring high-rolling customers to Macau from mainland China. The Chinese government limits the amount of money that can leave the main- land, so the junkets serve as an intermediary, arranging to take high-rollers to Macau, Joan them credit, and collect on the credit once back in China. Many of the junket organizers are speculated to be associated with organized crime as well, and many casinos—such as Las Vegas Sands and Wynn Resorts—have refused to do business with several junket outfits, and require extensive background checks on others suspected of organized crime. ‘Anew $5 billion bridge linking Hong Kong to Macau will cut travel time from over an hour (and in some cases, 4 hours) to only 40 minutes, saving a 40-mile ferry ride. The bridge should be completed in 2016. Other infrastructure improvements such as rapid transit rails from highly populated areas to Macau, and upgrades to the airport to double its capacity by 2017, should bode well for casino properties in Macau, practically the Cotai Strip area of Macau, which will see a new Wynn property and MGM property open in 2016. Japan is a potential new gaming industry player in the Asia region moving forward. Ahead ‘of the 2020 Olympics, Japan is aggressively seeking legislation to legalize gambling. 7 Future ‘Wynn Resorts concluded its fourth quarter of 2014 with a 32 and 5.8 percent decrease in rev- caues from fourth quarter 2013 in Macau and Las Vegas, respectively—blamed on a poor econ- omy.and a government crackdown on high-end gambling in China. A new smoking ban proposed in 2015 in Macau is also expected to hinder revenues if formally passed. Wynn currently has two main projects in the works: Wynn Palace in Macau with a cost totaling $4. 1 billion and expected ‘© open on Cota in 2016, and the Wynn Project in Massachusetts. Wynn's Massachusetts project is proceeding forward after the purchase of 33 acres of and in Everett, Massachusetts, along the Mystic River, Falling revenues and intense competition have plagued the industry over the last 3 years. Help CEO Steve Wynn develop a 3-year strategic plan to move his company forward.