MGM is pursuing diversification in its bid to attract younger customers

If you're looking for a Vegas casino on the rise and making the news, MGM is the one to watch.  The MGM chain has acquired a 50% stake in the Sydell Group as part of its vision of evolving into new entertainment and accommodations markets. The company wants to diversity from its focus on casino gambling in order to attract a younger crowd.  

The Sydell Group specializes in accommodations, specifically the boutique NoMad hotel chain and five other brands. According to a spokesman for MGM, the acquisition of the Sydell Group “is part of the next evolution of our growth opportunities.” The Sydell Group has 16 hotels that are either under construction or in operation in Los Angeles, Las Vegas, London, New York and other cities. Sydell also operates the Ned, LINE and Saguaro brands. Sydell Group operates Freehand, a youth hostel brand, but it intends to sell that Miami Beach property.

Sale

Ron Burkle, a private equity investor, sold his 50% stake in the company to MGM. Burkle, who heads Yucaipa Cos. will keep ties to Sydell through his ownership stakes in a number of Sydell’s hotel properties. The remaining 50% of the company’s shares are owned by Sydell Chief Executive Andrew Zobler and real estate investment firm Square Mile Capital plus other partners.

The purchase marks the first time MGM has become involved in a business that isn’t connected to gambling. MGM believes that by diversifying, it will be better able to weather any disturbances in the casino industry. NoMad is known for its upscale hotels. Suites during high season can go for more than $800 night at the NoMad New York property where it’s also famous for its cocktail lounge. 

Partnership

This isn’t the first time that Sydell and MGM have collaborated. In 2018, MGM partnered with Sydell to open a 293-room NoMad Hotel on the top four floors of MGM’s Park Hotel which is located on the Las Vegas Strip. Both companies are hoping that the new partnership will create more crossover opportunities. Both MGM and Sydell are exploring the potential to collaborate on additional joint properties and to share their loyalty points programs.

The deal between MGM and Sydell will leave Zobler in place as Sydell’s CEO. Zobler said that he believes that the deal with MGM will offer access to a broader distribution network and will give his company more clout when bargaining for commissions with online travel agents. Zobler said that there are “two types of survivors” in business. “Companies that get large and companies that occupy a niche. With this partnership, we’re trying to do both.”

Independent boutique hotels such as the ones run by Sydell tend to have greater appeal to millennial travelers. A number of large hotel chains have been acquiring the smaller companies lately. Hyatt Hotels Corp. recently bought Two Roads Hospitality, which included Thompson and Joie de Vivre brands, while InterContinental hotels Group PLC acquired Kimpton Hotels and Restaurants. 

MGM, like other Las Vegas-based casino giants, is becoming more focused on diversifying. It’s revenues from hotels, restaurants and other non-gambling lines of business are becoming more important as younger consumers migrate away from the gaming tables and slot machines and search for other forms of entertainment and recreation. 

Diversification

MGM Chief Executive Jim Murren credits the company’s non-gambling businesses with boosting Las Vegas revenues. On a conference call last month with Wall Street analysts, Murrren said that, even as gambling revenue is declining, non-gambling revenues are rising. In the most recent quarter the non-gambling revenue increased by 1% while the company’s gambling revenue declined 12%.

Protective Measure

According to Murren, the push into other businesses is also a protective measure that the company is taking against future economic downturns. Two decades ago, almost all of the company’s domestic revenue came from gambling. Today, approximately 40% of MGM’s domestic revenue comes from gambling and the rest is from other ventures.

In the past, casino operations were kept separate from lodging companies. Each had its own distinct business model. Hospitality companies derived most of their income from room rates while casino companies offered discounted or even free hotel stays at their properties to lure big-spending customers.

But casino operators are coming to the conclusion that they should diversify. The best way to do that, said Michael Pollock, a casino analyst at the Horsham, PA-based Spectrum Gaming Group, is to get into the hotel business. “The biggest challenge for gaming companies is being able to attract a younger demographic,” Pollack said.

Pollock says that both hotel and casino operators are driving business through loyalty programs. This, he explained, creates another opportunity to cross-market properties.

Revisiting an Old Model

Customers at NoMad and other Sydell-run hotels are generally affluent. They are the kind of clients that casino operators would like to lure to their gaming floors, bars, restaurants and nightclubs. 

The MGM-Sydell partnership isn’t the first time that a hotel company has tried to enter the casino business. During the ‘50s, before the Castro government nationalized the property, there was gambling at the Hilton Hotel in Havana, Cuba. Hilton also owned a casino at a Las Vegas hotel in the ‘70s.  

Casino operator Caesars Entertainment used to have a loyalty program where members could earn or redeem points at each other’s properties but that agreement ended when Marriott International acquired Starwood. Caesars now has a similar arrangement with Wyndham Hotels and Resorts.

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