Case Analysis – MGM

Case Analysis – MGM

Read the MGM Case Study in Case Study section of the text. Write a summary of the case study. In your summary be sure to discuss reasons why MGM would use an international strategy to achieve strategic competitiveness. Your summary should be a minimum of 2-3 double-spaced pages and must be in your own words. Use APA style. You must include 3-5 references. Only one reference may be from the internet (not Wikipedia)

INTRODUCTION

 

This case examines MGM Resorts at a critical time of strategic evaluation.  Vulnerable to the effects of a delayed economic recovery and the decision to follow through with previous strategic commitments, the company can no longer ignore the new realities of the industry and its own performance failures.

 

The case reviews the company’s history, strategic initiatives, competitors, gaming and hospitality industry, suppliers, and customers.  It also discusses the competitive forces that impact the industry’s profitability potential and provides extensive coverage of financial results experienced by MGM Resorts and its rivals.  With a full understanding of the current situation, the task is to determine if the company’s resource portfolio is being properly managed.  The ensuing evaluation should produce recommendations which strive to restore fiscal balance, generate competitive vitality, and enable long-term sustainability for MGM.

 

• Using the five forces model of competition, characterize the industry’s level of rivalry, and assess its attractiveness in terms of profit potential.
• Summarize the effect that current industry conditions have had on each of MGM’s key competitors. Gauge the company’s performance as it relates to other gaming and hospitality firms.
• Probe into the financial data provided in the case to discover explanation(s) for MGM’s results.
• Based on this analysis, what strategic measures can you propose to provide immediate relief and to establish a long-term platform for succeeding in the industry?

 

At the time of the case, the competitive forces in the gaming and hospitality industry have the following levels of influence.

 

 

 

Threat of New Entrants	Supplier Power	BuyerPower	Threat of Substitutes	Intensityof Rivalry
Low	Low	High	Moderate	High

Barriers to Entry

 

 

 

 

 

Forces Contributing to Rivalry

 

 

 

 

 

Although participants in the industry have bargaining strength to control the costs of inputs, and new competitors are unlikely to emerge, the level of competitive rivalry amongst existing competitors is intense.  The largest hotels/casinos are desperate to stay economically viable in the wake of the recession, and they have the resources, systems, and political influence to retaliate in response to competitive behavior.  This, of course, places even further constraints on the ability of gaming and hospitality businesses to achieve profitability in the given environment.

 

In an industry previously considered recession proof and guided by a “bigger is better” philosophy, firms have reacted differently to the challenging conditions of the market.  While many companies have portfolios similar to MGM and compete in various geographic markets with a variety of casino sizes and target markets, the company has five primary competitors.  The table below compares each of these competitors in terms of their strategic response and performance results recently achieved.

 

	Strategy During Recession:	Results:
MGM	Consolidated energies and efforts to survive amidst massive development of CityCenterSpent only 3.4% of sales on capital expenditures Refinanced debt to avoid casino closings	Lost market shareNet sales fell 16.5% from 2007-2010 GPM fell 10 points to lowest rate in industry Earnings fell 200%, EPS fell 140% Share prices fell 84%, and another 11.4% in first quarter of 2011 Operating cash flow fell 59.1% Net debt-to-EBITDA nearly doubled to 11.5 Currently reporting 3.3% increase in revenue derived from non-casino sales
LVS	Suspended unprofitable operationsContinued opening casinos Spent 29.5% of sales on capital expenditures	Net sales increased 132%Earnings increased $650 million (from -$50.6), EPS increased 55% Share prices fell 59% Operating cash flow rose $2.1 billion Net debt-to-EBITDA is 3.6 Despite allegations of illegal activities, leading the group’s rebound out of the crisis

 

As MGM focused on survival and continued with the enormous commitment of developing CityCenter, its competitors were able to stake a claim of the company’s market share. The third largest company in the industry in terms of revenues, MGM’s profits dropped to the industry’s lowest gross profit and net income margins in 2010. Meanwhile, its rivals did not suffer similar recession-related decreases in profitability. LVS’s and Wynn’s new casino openings led to significantly improved results for the mega-rivals, but MGM’s launch of CityCenter in December 2009 led to a precipitous fall in stock price and growing net losses. The discussion and facts of the case indicate that the company has been out-performed by its competitors in nearly every measure of financial wellness (refer to Exhibits 7, 8, and 13). At the brink of bankruptcy, the company had to be bailed out by taking on a foreign (Dubai) partner to avoid ratings deterioration and to continue normal operations.

 

Showing signs of a rebound with a 3.3% increase in revenues, the company remains dramatically behind the 36.4% average achieved by Boyd, Penn, Wynn, and LVS during the first quarter of 2011. Even internationally, MGM’s returns are lower than the others (refer to Exhibit 14).

 

It is important to understand what performance indicators mean in terms of a firm’s strategic response. As management makes decisions with the company’s assets and strives to effectively manage its resource portfolio, it needs to be able to identify the firm’s core competencies and to interpret key financial measures. A close evaluation of the data provided in the case yields the following insights to help MGM formulate a strategy that is suited to the company’s current circumstances.

 

• MGM uses 11,000 more employees than LVS to generate $1.5 billion less in revenue. Net revenue per employee is lower than all of its major competitors (with the exception of Boyd). Net income per employee is the lowest in the industry. These measures of employee productivity are indicators of seriously disadvantageous operational inefficiencies.
• Casino revenues as a percentage of total revenues have fallen notably in the past year. See the figures below.

	2009	2010	Comments
Casino Rev.	$2.618 billion	$2.443 billion	Driven by -13% table game revenue means that guests are gambling less
% of Total Rev.	39.4%	36.7%
Non-Casino Rev.	$4.026 billion	$4.210 billion	Indicates successes at generating income from room, food/beverage, entertainment, and retail categories
% of Total Rev.	60.6%	63.3%

 

• MGM’s profit margin is -23.58%, which is more than twice as low as its nearest competitor’s (Caesars). GPM fell 10 percentage points in 2010, putting the company at the bottom of the industry group. To understand MGM’s inadequate profit performance, it is helpful to investigate how its costs break down. Limited detail is available in the case, but CGS, SGA, D&A, and interest figures are tracked from 2005 to 2010. A close looking at the trends in these expense categories indicates that, with stagnant (or reduced) revenues, costs of revenues have risen by 8.3% as a percentage of revenues. Sales and general administrative expenses are up by 4%, and depreciation and amortization expenses are up by 1.4% as a percentage of revenues. Interest nearly doubled, going up by 8.5% as a percentage of revenues. (These data are presented in the table on the next page.)

 

In addition, net income was heavily impacted in 2009 ($1.13 billion) and 2010 ($1.42 billion) by the recording of substantial losses from the sale of assets. These unusual items represent the folding of the Atlantic City project and the sale of Treasure Island Resort and Casino. Though these losses are hefty, they are not recurring losses, and net income margins should see a 23.6% improvement, just from the absence of this item in 2011.

 

	2005	2006	2007	2008	2009	2010
Rev	$ 6,128.8	$ 7,176.0	$ 7,691.6	$ 7,208.8	$ 5,978.6	$ 6,019.2
CGS	$ 3,316.9	$ 3,715.1	$ 4,027.6	$ 4,034.4	$ 3,539.3	$ 3,757.5
	54.1%	51.8%	52.4%	56.0%	59.2%	62.4%
SGA	$ 1,036.2	$ 1,367.1	$ 1,604.7	$ 1,420.4	$ 1,312.1	$ 1,257.3
	16.9%	19.1%	20.9%	19.7%	21.9%	20.9%
D&A	$    560.6	$    629.6	$    700.3	$    778.2	$    689.3	$    633.4
	9.1%	8.8%	9.1%	10.8%	11.5%	10.5%
Interest	$    628.7	$    749.2	$    691.1	$    609.3	$    775.4	$1,113.6
	10.3%	10.4%	9.0%	8.5%	13.0%	18.5%
Sale of Assets	$            –	$            –	$            –	$            –	$    1,131.6	$    1,422.6
					18.9%	23.6%

 

• Debt is high throughout the industry, but MGM’s debt (valued at 200% of revenue) is not sustainable over time. The burden of a high debt load reduces the company’s financial flexibility and is responsible for its reduction in capital improvements, which play an important role in maintaining positive customer perceptions of the MGM brand. It also leaves the company vulnerable to a takeover, particularly as Kerkorian steps away from his long-held leadership position at MGM.

 

However, not all news was bad for MGM. Three properties within the conglomerate saw double-digit EBITDA and have even higher projections for 2011.  They include Mandalay Bay, Bellagio (both recently acquired properties), and MGM Grand Las Vegas. All of these properties are Las Vegas Strip sites, where MGM has 56% of its holdings. 67% of the company’s operating income was generated at the Bellagio, MGM Grand Las Vegas, and MGM Grand Detroit locations. The decision to keep the Detroit and Biloxi sites open proved to be sound, as they are now credited with generating the greatest cash flow from among the MGM properties. The company also experienced higher than expected earnings from its Macau property, representing MGM’s greatest increase in profit. The additional $100 million brought in by Macau reduced net losses by 1.6%. In addition, MGM has seen its recent cost savings strategies begin to take hold. Along with the introduction of the M-Life customer rewards program, these initiatives have had a favorable (although slight) .6% effect on GPM. Finally, it is worth noting that even in the “darkest of financial times,” MGM was able to raise capital—providing the company with an additional $7 billion in liquidity.

 

When the old model of doing business in an industry begins to fail, uncertainty is high. Changes in hospitality and gaming industry conditions are sufficient to warrant a modification of MGM’s business strategy. Where bigger was better and growth through acquisitions were successful philosophies in the past, the company now needs to operate smarter, with more finesse and operating discipline. MGM first needs to maximize short-term performance to address the pressing financial demands on the company. Then, it needs to structure a long-term strategy to secure a permanent position of leadership and competitiveness in the industry.

 

Short-Term Goals and Measures

 

Room occupancy is improving, along with the convention market. MGM is expecting 3–5% sales growth in 2011–12, but with a slip in earnings of .3% and .6% in each of the upcoming years. The company needs to “stop the bleeding” to reverse the flow of market share to the competition and the negative earnings projections. This is crucial for meeting its 2013–14 debt maturities and to recover from a recent period of underinvestment. (In fact, the company’s low level of reinvestment in 2010 is an immediate threat to the quality of the MGM portfolio, which can also have long-term negative implications.) Strong operating cash flows are necessary to fund the capital requirements needed to maintain and revitalize assets throughout the company, to repay debt financing, and to provide excess cash for future needs. Some steps MGM can execute to quickly make up ground against its competitors and to get by until the market makes a full recovery are outlined below.

 

• Building on its marketing strengths, seek a greater share of the events and meetings market, as it is recovering more quickly than the leisurely traveller market.
• Leveraging its personalized marketing capabilities and effective promotional tactics to encourage loyal customer visits and increased gambling activity for short-term revenue gains. (To positively impact casino revenue, recall that high-end guests typically spend more on gaming activities.)
• Using its skills at marketing to target customer segments, offering high-demand shows and performers, and communicating with distinctive and memorable promotional programs, thoughtfully targeting attractions to receptive audiences. This may involve “fun” entertainment, rather than extravagant events, given the current influences of the economic climate on consumer spending.
• Taking immediate measures to improve employee productivity and operational efficiencies. Use the company’s best practices from operations that are generating cash (Biloxi, Detroit), operating income (Bellagio, Grand LV, Grand Detroit), EBITDA (Mandalay Bay, Bellagio, Grand LV), and profit gains (Macau).
• Make necessary capital improvements to high performance locations first (those listed in previous bullet) to make up for delayed renovations and upgrades, prevent a deterioration of customers’ perceived value, or eliminate any visible degradation of properties or services that could signal lower quality, therefore value.

 

Long-Term Goals and Measures

 

It is uncertain whether consumer spending will resume at previous peak levels, but analysts are subtly optimistic in their support of the gaming industry’s long-term prospects. Buyers will be value-conscious for several more years, looking for cheaper offsite venues for their non-casino spending, and the domestic market is saturated; but overseas markets offer one bright spot in the industry. (In one month alone, Macau casinos are generating $1.68 billion, and local governments are committed to building infrastructure to deliver additional visitors.)

 

Long-term strategic initiatives must aim to create value, to pursue long-term growth opportunities, and to define an identity or image for MGM that will guide the immediate goals and actions of the company. Strategies need to clearly stipulate the company’s international intentions and the methods that will be used to differentiate MGM from the field of competitors. And the company must be able to manage and control costs associated with future major projects. (CityCenter went over budget by $2 billion, or over a quarter of total revenues.)

 

MGM’s past success has been related to the company’s reputation for delivering high quality gaming and luxury services. Its core competencies are embedded in providing the best hospitality and entertainment venues in the business and marketing “the finest assembly of resort brands in the hospitality industry.” (It is this high-end segment that Wynn has successfully penetrated to gain market share.) Properties like Biloxi, Detroit, Bellagio, Grand LV, and Mandalay Bay are the company’s “rain makers.” From a domestic perspective, the Las Vegas brand is still very strong and no longer has the negative image of debauchery attached to it as a destination. Taking these factors into consideration, the MGM brand should be tied to “luxury” and “Vegas” and be patterned after the strengths and identities associated with the company’s high-performing properties.

 

Based on new conditions in the market, the following strategic options can be suggested. Student proposals will vary, but they should able to build an argument in support of the recommended strategies they believe have the most potential for success.

 

• Downsize underperforming operations – Divest properties that do not meet performance criteria or fit with a new vision of MGM’s place in the market; will depend on the decision of which customer segments to target (such as high-end markets, Las Vegas Strip, etc.) and the brand management used for a focused differentiation strategy
• Expand into high growth and international markets – Expand MGM presence in regional markets with high potential returns (such as growing population centers FL, NV, and TX or bourgeoning regional markets PA and OH); important not to cannibalize pool of customers destined for Las Vegas or other existing sites; involves devising an international model that profiles local and regional preferences, rather than the potential visitor who might be travelling from America
• Grow through acquisitions – Though it may be reasonable to suggest restraint in acquiring new properties, given the industry’s status, several of MGM’s recently acquired properties have been the company’s top performers during the recent recession, including Bellagio, Mandalay Bay, and Biloxi’s Beau Rivage; will depend on the availability of desirable properties for purchase and the ability to secure capital
• Employ cooperative strategies – Meeting organizational objectives by entering new partnership agreements involves weighing the fiscal security and capacity for growth (that would not be possible if pursued independently) against the perception of weakness (that may impart a negative reflection on the company’s brand image or reputation)

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