When developer Ian Bruce Eichner first took out a $760 million construction loan for a Vegas condominium-hotel from Deutsche Bank, the financial institution had no idea that it would be making its first foray in the casino industry with Eichner’s project. Yet funding problems hit Eichner as construction costs began to rise and the economy started to worsen, causing him to default on the loan causing the casino to face foreclosure in 2008. Deutsche Bank has tried to woo other established operators such as MGM in taking on the project. Yet these operators already had their hands full with other projects. Another reason for their lack of eagerness was the negative effects the economic downturn had on the Last Vegas gambling industry.Thus, Deutsche Bank became the unwilling inheritor of what is now the Cosmopolitan Resort and Casino.
The Cosmopolitan is notorious for being the most expensive casino ever built in Las Vegas with an investment of around $4 billion. Indeed, Deutsche Bank went head on with the project, hiring Caesars Palace general manager, John Unwin, whose paycheck was reported to be almost $2 million. It was also said that the management team’s salaries were higher than the industry standard.Deutsche Bank also gave the project a low interest loan which led to the staggering $4 billion amount. The Frankfurt-based bank continued to pour money into the project, changing Eichner’s original plan of putting guitar-playing robots in the entrance hall. As a result, there is now a three-story glass chandelier in the hotel’s casino and a crystal bar.
Deutsche Bank isn’t the only financial institution that’s also a casino owner.Notable examples are Credit Suisse, which used to own a stake in the Hard Rock Hotel and Casino; and Goldman Sachs, which acquired Stratosphere. Yet none of these banks has a stake higher than Deutsche Bank, whose casino investment could take decades to recoup. The Cosmopolitan finally opened in December 2010 to positive reviews. Visitors loved the premier hotel and its luxurious surroundings. The $300/night?the highest room rate in Vegas?gigantic luxury rooms with wrap-around terraces areoften fully booked along with the other room classes. The resort also has an impressive lineup of shops and restaurants, including the automated luxury store U*tique Shop and steak restaurant STK.These offshoots from the casino have been reported to be successful since they have reached, and even surpassed, their sales targets.
With its positive customer feedback, it seems like Deutsche Bank could be headed for financial success with this venture.Yet despite its high occupancy rates, the Cosmopolitan has not been profitable so far. Why? Demographics and a lack of a loyal gambling customer base. Deutsche Bank is relying on a young market, a very challenging group since most of these individuals prefer partying to gambling, and would rather spend their money on food and beverages rather than on games,the gambling industry’s biggest source of revenue. Also, most of these visitors do not have very high incomes. Thus, they are less disposed to spending thousands of dollars on cards and roulette. In fact, this group isn’t inclined to spending in general.
To increase their customers and profitability, Unwin has made an agreement with Marriott International. The deal allows the Cosmopolitan to accessthe hotel group’s customer database. Yet is this enough to improve the casino’s low cash flow? Truly, the Cosmopolitan has yet to find a strong gambling base. While casinos usually contribute to half the revenue of a Las Vegas property, the Cosmopolitan’s gambling revenue is less than that. Aside from this, Deutsche Bank is also facing problems with casino operating clients who are unhappy about the bank pirating their talent. This could spell trouble since Caesars Palace’s mother company, Caesars Entertainment is a significant Deutsche Bank customer. Definitely, these customers would be wary of investing money in a competitor.
Still, the Cosmopolitan management team remains optimistic, though sentiments are different in Europe. Back in Germany, Deutsche Bank’s management remains hesitant onowning a casino. They’ve kept a low profile in the Cosmopolitan and CEO Josef Ackermann was even absent from its opening party. The management has also recently disapproved the Cosmopolitan’s racy advertising campaign which they thought was unsuitable for a bank.
