Losing Faith in Gambling's Allure

With consumers tightening their budgets, gambling both in lotteries and at casinos is downand some gaming stocks are off 80% or more
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Get-rich-quick schemes might seem appealing in tough times. But while gambling was once considered virtually recession-proof, state lotteries and casinos across the country are reporting sales declines as U.S. consumers battle the moribund economy. Some lotteries are managing to buck the trend by launching new products, but the overall trend shows many consumers shunning the lure of easy money.

"Just like Coke or Pepsi, we're competing for discretionary dollars in the marketplace," says David Gale, executive director of the North American Association of State & Provincial Lotteries in Geneva, Ohio. "People have fewer dollars left over after paying their bills, and they're spending carefully."

Sales for the 12-state game Mega Millions are down 8%, from $2.77 billion to $2.54 billion, for the 12 months ended November 2008 from the same period the previous year. Sales for Powerball, which runs in 29 states plus Washington D.C. and the U.S. Virgin Islands, are down 17% for the first half of fiscal year 2009 compared to the same period in fiscal year 2008.

Individual state lotteries are also reporting a slump, as revenues from New York to Virginia to Kansas have fallen. Lottery revenues from New York to Virginia to Kansas have fallen. Overall sales in Missouri are flat—after two decades of nearly unbroken gains—and it's the same in Washington State. For New York, sales of conventional lottery games, such as the multistate Mega Millions game, dropped 1.6% over six months, from $1.53 billion in April to $1.5 billion in September, although racetrack video products helped lift overall sales 2.8%. Lottery sales in Texas for the first four months of the 2009 fiscal year dipped 4.3%, to $45 million, reports Bobby Heith, a spokesman for the Texas Lottery Commission in Austin. "It's been a rough start to the fiscal year," Heith says. "We do have hopes of coming back."

Few Big Jackpots

In California, sales are down 10% since the beginning of fiscal year 2009, which began on July 1. "We believe the decline is caused by a slowing economy [and] the lack of recent large jackpots," says Alex Traverso, a spokesman for the California lottery. Traverso says he hopes sales will revive with larger jackpots and with the January launch of a new televised game show called Make Me a Millionaire. "We can't just show a bouncing ball and expect [consumers] to get excited," says Traverso. "We're now looking more at the game-show element."

At a 7-Eleven store in the Highland Park neighborhood near downtown Los Angeles, sales started dropping five months ago. The store is now taking in about 10% less than its usual average of $500 per day. "We have fewer customers in general," says Charles Nicassio, who owns and manages the franchise store. "People are just cutting back on everything and being more frugal." He says that some games prove resilient, however—like a bingo scratch card. "It's straightforward, and people understand it," he says. Still, not every lottery retailer is seeing a slowdown. "Sales haven't dropped at all in the lottery," says Stephanie Emerson, manager of a Flash Foods convenience store in Thomaston, Ga. "We get a lot of traffic on Fridays, especially when the Mega Millions [jackpot] gets real high."

Because other factors besides the economy determine lottery sales—namely, the size of jackpots and the appeal of new products—there are some bright spots. Georgia's lottery sales are up 3% from the same point in 2007, after enjoying record sales and profits each year for the last five, says Margaret Requa DeFrancisco, president and chief executive of Georgia Lottery. She credits aggressive marketing of the games, along with telling potential buyers that a portion of state lottery proceeds are used to fund scholarships for Georgia students and pre-kindergarten education. "There's a lot of marketing and energy behind it," says DeFrancisco. In one recent promotion at an Atlanta Falcons football game, the lottery offered scratch tickets for a chance to win a Harley-Davidson (HOG) Fat Boy motorcycle and a Ford (F) F-150 pickup truck.

Blow to Education

A portion of state lotteries' revenues—about 30%, on average—is funneled to public services, such as education. Though this money makes up only about 1% of the typical state's budget, those extra funds will be missed as cash-strapped states shed employees in such areas as education and senior citizen services. "State revenue officials are worrying most about losing income and sales tax revenue," says Ronald Fisher, an economics professor at Michigan State University. "But in this environment, every penny counts."

In California, about 34% of revenues from lottery sales is sent to the state treasury, financing about 1.5% of California's education budget. That amount has been more than $1 billion annually since 2000, reaching a high of $1.3 billion in 2006. The past fiscal year, however, failed to top the $1 billion mark. "It's not a lot of money [for education], but it's relied on," says California's Traverso.

Consumers' reluctance to take a chance is not just playing out at corner convenience stores: Gambling companies from Las Vegas to Atlantic City to Macau also are confronting hard times. A glittering growth story not long ago, the casino industry is under even more pressure than lotteries. Because customers usually travel to casinos—and spend extra money on lodging and meals—a gambling trip costs more than buying a lottery ticket and is among the luxuries cut from many budgets.

Gaming stocks have taken massive hits this year. Since Jan. 2, Las Vegas Sands (LVS) shares have plunged 93%, MGM Mirage (MGM) is down 83%, Wynn Resorts (WYNN) has lost 59%, and Boyd Gaming (BYD) is off 85%. Lady Luck, it would seem at the moment, is not with the house—or the lotteries.

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