Kaos closure may signal challenges for Las Vegas club scene

The sudden shutdown of Kaos nightclub and dayclub could be pointing to a broader slowdown of Las Vegas’ club scene, according to experts.

On Tuesday, Red Rock Resorts executives revealed the company was shutting down the Palms’ nightclub and dayclub, effective immediately. While experts say the Palms’ venue faced some unique challenges, its closure comes as the nightlife industry in Las Vegas faces major challenges, with shifts in profitability and customer demand.

“Customer demand has seemingly peaked in recent years and competition has only proliferated,” said Deutsche Bank gaming analyst Carlo Santarelli.

‘Stop the bleeding’ and regroup

What was once viewed as the anchor to the renovated Palms resort-casino ended up sinking its parent company’s earnings. On Tuesday, Red Rock Resorts reported a net loss of $26.8 million in the third quarter, a 207 percent decrease from the same period last year.

Santarelli said a number of factors made Kaos unprofitable, primarily its inability to lessen the costs of contracted talent. In turn, the company quickly pulled the plug on the venue.

“The ability of the property to overcome the losses being generated in the venue made waiting to see if things started to improve very expensive,” Santarelli said.

Additionally, Red Rock executives mentioned Tuesday that Kaos’ clientele did not spend money on other areas at the Palms — like food and beverage or gaming — as much as they had hoped.

“They essentially overestimated its crossover with the more profitable casino segment and underestimated the direct profitability of the club given the rising costs of entertainment talent,” said SunTrust Robinson Humphrey analyst Barry Jonas. “I think it’s a difficult but admirable decision to shut down the club — stop the bleeding early on and regroup.”

Following a trend

Santarelli doesn’t expect other properties to replicate Kaos’ rapid shutdown. Unlike larger venues, he said, it’s harder for a 700-room property like Palms to mask the losses of one of its venues. Additionally, he expects other venues to welcome back some of the customers who had been taking their money to Kaos.

Still, Kaos’ lack of success could indicate larger trends in the Las Vegas nightlife industry. Santarelli said the cost of entertainment for clubs has “exploded” over the last five to 10 years. In September, it was reported that the DJ Marshmello signed a two-year, $60 million contract to perform at Kaos before the Palms negotiated his departure.

Kaos’ shutdown is “undoubtedly indicative of how expensive it has become to compete in the Las Vegas nightlife arena,” Santarelli said.

As for the club scene’s potential customers, many are looking for more intimate, economical ways to spend their money, according to Ryan Dahlstrom, president of the Nightclub Hall of Fame.

The club scene “is not as much a novelty as it was before,” he said. “I don’t think it’s what it was five, six, 10 years ago (as a revenue generator) because it’s played out.”

Operations not sustainable

According to a 2018 report from the Las Vegas Convention and Visitors Authority, the number of visitors who said they had visited a hotel nightclub with a cover dropped from 13 percent to 7 percent between 2017 and 2018.

Additionally, the report showed bars and lounges showed to be more popular than nightclubs in the valley. While 7 percent of respondents said they went to a hotel nightclub, 52 percent made a stop at a hotel bar or lounge.

Dahlstrom said that instead of paying hundreds of dollars to drink and see their favorite DJ at a dayclub or nightclub, many customers are opting to find that experience elsewhere, such as at a smaller, multipurpose venue or festival.

While Dahlstrom doesn’t envision the major clubs in Las Vegas and other markets having to shut down in light of these changes, he said they’ll have to make some major changes. He expects to see clubs open fewer nights during the week, spend less on entertainers and offer more corporate and private events.

“It’s just not sustainable, the way they’ve been operating,” he said.

Contact Bailey Schulz at bschulz@reviewjournal.com or 702-383-0233. Follow @bailey_schulz on Twitter.