Know When to Hold
Casino Operators Ride Out New Waves of Change
By Megan Rowe, Contributing Editor -- HOTELS Magazine, 9/1/2001
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Following years of opening splashy new casino hotels,
pulling off blockbuster mergers and diving into
new markets, gaming companies seem to have shifted into a wait-and-see
mode. Fueling this new attitude are the impacts
of the slowing global economy, the uncertain threat of Internet gaming,
fresh competition and hints that more countries might be throwing the
door open to casinos. Minding the store seems to be the top priority
these days.
As gaming gets the green light in more communities,
maximizing the value of existing properties makes sense. Ten years
ago, casino operators were concerned about whether the proliferation
of gaming venues would dilute the market. "Clearly, we have not seen the [development]
numbers that were projected," says Mark Moskowitz, a Los Angeles-based
attorney who has been involved in casino development for more than 20
years, associated with such projects as New York, New York; Rio and
The Mirage. And, despite a few pockets facing over-capacity issues,
the new markets seem viable and may be stoking demand indirectly for
destinations such as Las Vegas. "In many cases, the growth created
greater familiarity with the entertainment component of gaming for wider
swaths of people," Moskowitz says. "People went to the local
casino and said, 'Let's go to Las Vegas-look at all there
is to see and do."
Worldwide, cities and countries approving gambling continue to expand,
presenting both a challenge and an opportunity for casino operators.
They need to keep their existing operations fresh, and if they want
to achieve growth, they also need to explore new markets. Among the
hits and misses in the emerging markets:
- In the last decade, fueled largely by investments from major operators,
riverboat gaming in the United States has taken off. Markets like Detroit,
Chicago, and Biloxi and Tunica, Mississippi, have embraced gaming, although
several are struggling to absorb the capacity. The opening of Greektown,
Detroit's fourth casino, has strained performance at the existing establishments,
but MGM Mirage officials believe that if city officials allow hotels
to affiliate with the casinos the market will improve.
- Two large casinos in Connecticut have performed
astoundingly well since opening in the mid-1990s,
generating US$1.5 billion in gaming revenues. One,
Mohegan Sun, is planning a US$960-million, 1,200-room expansion
that will create the largest casino operation in North America,
if not the world. "The demographics are really enormous," says Butch
Kerzner, president, Sun International Hotels, Paradise Island, Bahamas,
one of the developers. "There are about 22 million adults within
150 miles."
- Atlantic City, New Jersey, long considered a mature market, is being
revitalized with the construction of the 2,010-room
Borgata, a joint venture between MGM Mirage and Boyd Gaming that will
bring a modern Las Vegas-style destination product to the seaside
town in 2003.
- Greece, which legalized gaming in 1994, has been a solid market
for Hyatt Gaming. Hyatt Gaming runs the largest casino in Europe there,
the Regency Casino Thessaloniki, and is eyeing a
second property.
- Atlantis has revitalized the Bahamas market; the 2,400-room Sun
International resort, running occupancies in the mid-90s with a US$245
ADR, plans to double its rooms count in the next two years.
- The United Kingdom, Mexico, Taiwan, Macau, Vietnam, Sweden, Switzerland
and Argentina are either considering or have approved
legal gaming.
- Nevada casinos outside of Las Vegas are not holding up well under
growing competitive pressure from emerging Native American casinos
in California, a development that industry observers
are watching closely.
- Ceasars Palace, Las Vegas, anticipates opening
a new 29-story tower designed by Wimberly, Allison,
Tong, & Goo,
Honolulu.
Little Impact From The Economy-So Far
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Although many industry watchers were concerned
that a slowing economy might dampen enthusiasm for gaming, so far
this year that hasn't been the case. "We believe that when a recession comes or there is a
slight correction as we've seen, customers still believe in the entitlement
of their free time," says Larry Lewin, president, Hyatt Gaming,
Chicago. "Their entertainment dollars may be lessened, but that
immediate gratification is still needed."
Atlantic City has faltered a bit, with revenue
off about 1% so far this year. But Las Vegas seems to be holding its
own, with gaming revenue up about 1% through April. "This year, Las Vegas has been surprisingly
robust, especially on the hotel side," says Brian Egger, gaming
and lodging analyst, Credit Suisse/First Boston, New York. "RevPAR
has held up better than most observers had been expecting." Egger
says results so far this year show gaming is less cyclical
a business than has been perceived in the past.
Jason Ader, senior managing director, Bear Stearns,
New York, agrees that gaming seems a little more recession-resistant
than other businesses. "But
declines in personal consumption certainly have negative implications," he
adds. Casino operators are bracing themselves accordingly.
"I think all of us in this business are kind of tightening our
belts a little and preparing for what appears to be a little softer
time ahead," says Alan Feldman, vice president of public affairs,
MGM Mirage, Las Vegas. But he thinks operators like MGM Mirage, which
offers properties at various price points, might see guests trading
down rather than canceling trips outright. "They're adjusting their
cost for the experience," he says.
Investors seem to have confidence in gaming stocks,
as well. While companies in other industries have been battered this
year, the five largest gaming stocks have been trading at prices in
the middle of last year's range. Analysts particularly like the long-term
prospects of the three biggest operators, MGM Mirage ("the best collection of
physical assets in Las Vegas," says Egger), Park Place Entertainment
(opportunities to expand in Las Vegas and Atlantic City,
better results in markets where it lagged last year) and Harrahs (for
its consumer marketing strategy and loyalty program).
Another reason for minding the store and trying
to pump the most out of existing operations: Growth was simpler when
there were more competitors, but sustaining that growth is getting
increasingly difficult. With all the merger activity in recent years,
the field of candidates for acquisitions has narrowed considerably. "But there are always opportunities,
especially among the ranks of smaller operators," says Egger.
The cost of mounting a new project is also putting
a damper on growth. "It's
becoming increasingly competitive from a capital standpoint," Kerzner
observes. "The type of product being developed, especially in Las
Vegas, is better and better all the time and requires
more capital."
Moskowitz says a number of potential developers
have creative ideas for new casino resorts, "but the ability to get these projects
built is increasingly difficult, particularly in Las Vegas, where the
price of land has gone up." The industry is eager to hear about
former Mirage owner Steve Wynn's plan for the famed Desert
Inn parcel on the Strip.
The other potential threat to the status quo,
Internet gaming, seems less so with every passing month. In fact,
the industry giants all have a stake in firms developing Internet
games and operate their own Internet gaming sites offering non-cash
casino games and prizes. Their attitude seems to mirror Las Vegas-based
Park Place's CEO Tom Gallagher's: "We're
positioning ourselves intelligently on the Internet, and we're prepared
to move wherever and whenever it's appropriate." When that is depends
largely on changes in law and technology refinements
that will keep minors from wagering online.
In the end, most observers are convinced the Internet won't take a
bite out of business in well-developed destinations such as Las Vegas.
Keeping People Entertained Is Key
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In the last decade, casino resort operators have learned
that focusing on the gaming side of the business is no
longer enough to sustain guests' interests or to generate
profits. Despite developing Mohegan Sun, with the largest
casino in North America, "we're
not in gaming just to be in gaming," says Kerzner. "We didn't
just put up a box with a lot of
slot machines and table games. We spent a lot of time
and money planning something that was more of an entertainment
attraction."
The survivors in this business seem to be the
companies that find the right mix of gaming, dining and entertainment
to attract repeat guests. Boyd Gaming and MGM Mirage are hoping they've
hit on a winning formula in Atlantic City with the Borgata, which
will combine the largest hotel in the city with a large casino, European-style
spa, four entertainment venues, 11 restaurants, a variety of retail
options and meeting space. "Customers
have told us at every level of the market that they're ready to trade
up," says Bob Boughner, COO, Boyd Gaming, Las Vegas, and CEO of
the Borgata, which will be the first new hotel to open in the market
in 13 years. It has already set off a flurry of renovations and upgrades
at competing hotels. Atlantic City visitors, Boughner says, are "tired
of the facelifts, the small guestrooms and renovations.
They know it's not up to snuff, and they told us there's not enough
for the non-gaming travel partner to do in the market today."
Flexibility also seems to be an important aspect of survival. That
might mean something as simple as changing out the slot machine games
more frequently, which technology has made easier. In Greece, Lewin
recalls that relaxing a stuffy dress code opened up the casino's slots
business and overall volume almost overnight. And at one U.S. property
that focused on entertainment, a move away from booking acts and toward
increasing value in the slots area has turned the operation around.
"One thing we've found is that everything has to constantly move," Lewin
says. "What you did today you may do tomorrow, or you may not,
but you have to be sensitive to what the customer wants."
Len Wolman, chairman and CEO, Waterford Hotel
Group, Waterford, Connecticut, and a co-developer of Mohegan Sun,
agrees. "One of the biggest
challenges is developing the right kind of facility, making sure it's
efficient and keeping it exciting," he says. "That means different
things in different markets."
Vegas F&B: From Loss Leader To Solid Profit
Center
At Bellagio, customers sometimes wait two hours
to plunk down US$22.95 for an all-you-can-eat buffet-a far cry from
the old days of US$1.99 spreads. "Plenty of people are still looking for a buffet experience.
They are looking for value, but they're willing to pay for quality," says
Elizabeth Blau, senior vice president of restaurant development,
MGM Mirage, Las Vegas.
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Instead of bogging down the balance sheet, restaurants in many of the
city's newer hotels enjoy a bustling and very profitable business. Guests
no longer respond to the price alone, as the improved quality and diversity
of restaurants have given the city a reputation as a dining mecca of
sorts.
When it opened nine years ago at the Forum Shops
in Caesars Palace, Spago was considered a risky venture. "The city was based on comps
and buffets, and there was a perception that sophisticated people weren't
coming to Las Vegas," says Tom Kaplan, senior managing partner
with the Wolfgang Puck fine dining group, Las Vegas. "All those
people were wrong-we were flooded with business." Today, the 300-seat
Spago takes in about US$11 million annually.
The Spago experiment cleared the way for four additional Puck-inspired
restaurants and a gradual realization by the competition that visitors
to Las Vegas were willing to pay for high-quality food and professional
service in spectacular settings-what diners would expect in any city
with top-notch restaurants.
With 106 separate operations in 13 hotels and
nearly US$800 million in annual revenue, MGM Mirage's F&B division
could pass as a stand-alone restaurant company. Blau thinks a key
reason for the company's foodservice success is its ability to satisfy
a spectrum of tastes and budgets.
Despite the diversity in its portfolio, Blau says
a good steak remains the most sought-after meal in Las Vegas. "Steakhouses do enormously
well. Every one of our properties has one," she says. Prime, the
Bellagio version, is "enormously profitable, as you can imagine,
because of the sheer volume of people." On a busy night the 160-seat
establishment can do 300-400 covers with an average per-person
check of more than US$100.
MGM Mirage is constantly reviewing which restaurants
work and which don't. A 600-seat café at the Mirage was considered a poor use
of space, so it was carved into a café, a Chinese noodle kitchen
and a Brazilian-style buffet, all of which perform well.
"We're constantly finding new spaces that can be converted," Blau
adds. And once or twice a year, a restaurant might not be performing
up to snuff, so the F&B staff goes back to the drawing board. Sam's
at Bellagio, for instance, was "only" pulling in about US$5
million to US$6 million a year, and management thought
the numbers could be improved. So the space is being retooled to overcome
some perceived design issues that prevented it from reaching its full
potential.
Aladdin: What Went Wrong?
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Despite the best intentions and the fattest budgets, not every mega-resort
that opens in Las Vegas is a slam dunk. The Regent in Summerlin is in
the process of finding a new owner with the hopes of bouncing back from
bankruptcy. The US$1.2 billion, 2,600-room Aladdin Resort and Casino,
which opened last year, first faltered at its grand opening, when delays
in safety testing pushed the event back 16 hours. Since then, Aladdin
has struggled to attract the kinds of crowds its competitors seem to
draw with ease. In its first seven months, the property produced fewer
than US$20 million in cash flow, far short of what it needs to satisfy
a US$74.4 million annual debt and lease obligation. In the first quarter
of this year, it lost US$47.2 million on net revenues of US$73.7 million.
Some experts think it will take another cash infusion, perhaps as much
as US$100 million, to right what's ailing the casino resort. Critics
charge that the property isn't user-friendly. Despite a prime location
on the Strip, the main entrance is nondescript, unlike the competition's
glitzy and distinct entries. Arguably the biggest sin, however, is breaking
two cardinal rules of casino hotel design: Guests can pass between shopping,
guestrooms and meeting rooms without entering the casino, and it's not
immediately clear where the casino is.
"It's very awkward, hard to navigate, too crowded and inferior
to the competitive experience," says Jason Ader, senior managing
director, Bear Stearns, New York. "We're not optimistic about its
prospects in its current form."
Owners London Clubs International, London, and the Sommer Trust, New
York, have taken steps to staunch the bleeding. Last spring, the staff
was reduced from 4,000 to about 3,200. An architect has been hired to
redesign the entrances, and the slots area has been reconfigured to
boost the average win per machine.
But some observers say the resort in its current form will never generate
enough cash flow to cover its debts. And the owners may
not be able to provide the additional funds necessary to bring it up
to speed; they don't have the deep pockets of the three large casino
operators sharing Strip space with Aladdin. One of those operators,
Park Place Entertainment, Las Vegas, owns one-third of Aladdin's bonds
and is rumored as a likely buyer, but Park Place management has hinted
it is not anxious to throw good money after bad. Other potential buyers
seem to be taking a similarly guarded attitude toward the troubled resort,
despite its ideal location.
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