Short Odds
The gaming industry has rebounded from the hard hit of September 11 and looks to be on a roll worldwide heading into 2003.
By Mary Scoviak, Features Editor -- HOTELS Magazine, 9/1/2002
|
Deregulation and diversification are shifting the
odds in favor of the global gaming industry. Hungry for expansion,
the world’s casino hotel operators—and their
non-casino urban and resort competitors—are closely
watching the UK’s steady move toward gaming deregulation.
Switzerland has just reviewed its liberalization process,
while Austria, Belgium, the Netherlands and Italy are
contemplating expanded licensing. Eager to make a bigger
mark in Asia, Macau ended four decades of Stanley Ho’s
gaming monopoly this year when it issued casino licenses
to U.S.-based gaming icons Steve Wynn and Sheldon Adelson.
Social concerns aside, governments facing slower economic
growth are finding it hard to ignore the revenue-building
lure of gaming.
From the hotel industry’s standpoint, the UK is the near-term
market to watch. A key recommendation in the Budd Report, the Gambling
Review Body’s recommendations on UK gaming deregulation, would
open the way for development of casino resorts, something which proponents
say would broaden the domestic business base and expand the UK’s
appeal to international tourists. Given the level of support garnered
from the Department of Culture, Media & Sport, as well as anticipated
backing from Queen Elizabeth II in her October address,
hotel companies are jockeying for position in the hope that Parliament
could hear the deregulation bill as early as 2004.
Hilton Group already sent up a trial balloon with
a proposal to introduce Las Vegas-style casino operations to its Brighton
resorts and showcase roulette, slot machines and cabarets in other
coastal hotels. Marc Etches, managing director of Blackpool, England-based
entertainment company Leisure Parcs, may finally see the payoff for
his long crusade for regulatory reforms to reposition Blackpool as
an Atlantic City-style gaming experience. Leisure Parcs’ plans for the intensively themed, US$220 million
(£150 million) Pharaohs Palace include 100,000 sq.ft. (9,000 sq.m)
of gaming space (10 times that of the average regional casino) with
80 table games and 2,500 slot machines, 1,000 hotel rooms and suites,
as well as 40,000 sq.ft. (3,600 sq.m) of conference space, retail and
entertainment areas. Etches contends that Blackpool has the capacity
for several such resort complexes, each of which could generate an estimated
3,000 jobs and inject US$147 million (£100 million) into the regional
economy.
Speculation is rife that existing UK-based casino
companies want their fair share in the rewards of a hotel/entertainment/casino
complex either by expanding their internal skill set,
selling their expertise or joint venturing with hotel
operators. Gala Leisure Ltd., which acquired Hilton International’s Ladbroke casinos for US$337
million (£235 million), is reviewing its options, including an
IPO. Rank is a clear contender. It has major participation in the UK
gaming industry with Mecca Bingo, Grosvenor Casinos and online gaming,
as well as in-depth understanding of the leisure side with Hard Rock
Café International and Deluxe Entertainment.
Finding partners may not be as difficult as fending
them off. Chastened in its failed attempt to take over
Compagnie Européene de Casinos,
France’s Accor Casinos is well equipped to move into the British
market. “Some UK casino operators are wondering whether American
casino operators will go to Britain. If so, they are
throwing up defenses in the wrong direction,” says David Marshall,
Accor Casinos’ international
development and operations director. Marshall says Accor’s combined
hotel/casino expertise is a comfortable fit with the
aims of the Budd Report. But it is not the only continental
contender. “The
Netherlands and Austria, with solid casino monopolies,
have been honing their gaming skills to perfection over the years, just
waiting for an opportunity like this,” Marshall adds.
|
Mark Harms, managing director, CIBC World Markets,
London, “expects” U.S.-based
operators such as Park Place, MGM MIRAGE and Harrah’s to consider
large casino hotel developments in the UK—assuming passage of
appropriate legislation and reasonable taxation. Australian
gaming leaders, such as Tab Ltd., could be among other international
hopefuls. Domestic hotel companies also will be analyzing the pros and
cons of applying for one of an estimated 100 to 300 new licenses.
Before any major invasion is launched, companies
must weigh key issues, ranging from the real depth of the market to
taxation and the development process. “There has been a deafening silence on the tax issue,” says
Michael Hirst, consultant to Insignia Hotel Partners,
London. The government has yet to reveal its proposed tax structure
for casino and casino/hotel operations. Nor has there been discussion
about what could be the nettling question of local planning approvals.
More to the point is whether hotel casinos will
find a profitable niche in the UK. Hirst cautions that some may be
over-estimating the size of the opportunity. He sees hotel casino
licensing as benefitting convention business and building both holiday
and weekend traffic. “These
will be premises for occasions—for a night out or a weekend away.
That will make the entertainment and dining facets more important,” he
says. “What I cannot see is a mega, Las Vegas-style complex.”
Neither can the Gambling Review Body headed by Sir Alan Budd. The report
suggests a meager 2,000 sq.ft. (180 sq.m) should be devoted to gaming
within the casino, with about 8,000 sq.ft. (720 sq.m) of ancillary space.
Though an education process may be necessary in a market that in August
approved liquor service in casinos, Etches sees a ready market for larger,
destination projects. He points out that 300,000 British travelers visit
Las Vegas annually, more than from any other European country. While
Blackpool is not aspiring to be another Las Vegas, Etches contends that
it can match its style and tap both a national and international market.
Betting On The Continent
Despite the near-term promise of a deregulated
Britain, companies looking longer term also are assessing continental
opportunities. Marshall points to the potential of “casino resorts” on
the continent, particularly in countries such as Italy, which currently
has “four casinos for 60 million people and a present government
whose promises can only be fulfilled with indirect taxation.”
Germany also has significant potential for casino expansion, Harms
says, if the national and regional governments decide to privatize existing
casinos and restructure the tax rates. Though discussions are just beginning,
most regulators currently favor creation of destination casinos accessible
from, but not within, major city centers. The Mohegan Sun model in Connecticut,
with its phased casino/hotel opening and regional draw, has attractive
implications. Phased openings of the casino and hotel allow regional
business to mature into a steady revenue stream before bringing the
hotel/entertainment/retail facets on line.
Nimble Play
|
The Mohegan Tribal Nation’s Mohegan Sun casino-resort in Uncasville,
Connecticut—developed by Waterford, Connecticut-based Waterford
Group and managed by gaming giant Kerzner International—embodies
many of the current operational and development trends.
Like its Las Vegas counterparts, it has developed a diversified revenue
base that is making it a destination resort rather than merely a casino
with hotel rooms.
“People do not just see Mohegan Sun as a casino. Four of our
29 stores are among their chains’ sales leaders in New England,” says
Mark Brown, chairman of the Mohegan tribe. “Some are the sales
leaders for the United States. We thought the retail
component would complement our other offerings, but it has taken on
a life of its own.”
This level of diversification is remaking the
casino hotel business model. MGM MIRAGE, whose Treasure Island in
Las Vegas was the first hotel designed to derive revenues on a 50/50
basis from casino and non-casino sources, continues to push its restaurant,
hotel and entertainment to broaden its profit base. “There is still a lot of room for evolution
on the food and beverage side, whether with star chefs or top name restaurants,” says
Alan Feldman, MGM MIRAGE’s senior vice president, public affairs. “Retail
space was nothing 10 years ago. Now, if a retailer is
not in Las Vegas, it is not even on the map. Part of what makes Las
Vegas so successful is its willingness to change and be flexible.”
Flexibility will be necessary to survive in the near term. Jason Ader,
senior managing director and gaming analyst, Bear Stearns, New York,
forecasts a flat 2003. A rebound in travel should send ADRs up 5% in
2004. However, most casino hotels are not waiting for the sunshine.
Lehman Brothers’ Joyce Minor predicts more companies will follow
Harrah’s lead in introducing new yield management tools to optimize
hotel room bookings based on customer worth.
Harrah’s also is implementing casino floor management tools that
combine slot data with customer data, enabling slot floor managers to
make educated decisions about slot machine placement and merchandise
mix. As casino hotels work to raise average rate and rooms revenue,
Minor sees more operators emulating Aztar’s Tropicana Atlantic
City’s decision to reduce the number of rooms reserved for rated
players in order to increase overnight stays from new
or first-time players.
The casino hotel product also is changing. Feldman
contends that a “truly
integrated” hotel such as the US$1 billion Borgata, a 50/50 joint
venture between Boyd Gaming and MGM Mirage slated to open in 2003, will
position Atlantic City as something other than a day-trip market. “The
city has a beautiful convention center. It just needs some new roads
to get people off city streets,” he adds. With the Super Bowl
slated for 2006, Feldman also forecasts that Detroit
will continue on its current roll. The Motor City has yet to prove how
well it can fill hotel rooms, but its casinos benefitted from a record-smashing
December revenue total of US$94 million. MGM MIRAGE is reviewing plans
for a mid-sized hotel to test demand.
Len Wolman, chairman of the Waterford Group, which
is developing a casino hotel in the Catskills for the Stockbridge
Munsee Mohicans, acknowledges that not many areas of the United States
can support new mega casino hotel complexes. “There are still some niche opportunities in
Atlantic City and Las Vegas. But we are targeting destinations with
less competition, where one major project would create high barriers
to entry,” he says. Developers like Wolman and hotel casino operators
such as Las Vegas’ Station Casinos are both trending toward areas
with higher demographics.
Station Casinos went upmarket with its newly opened,
US$300 million Green Valley Ranch & Spa in Henderson, Nevada. A similar project
with 200 to 400 rooms is slated to begin construction in 2004 in the
Summerlin area on the west side of Las Vegas. Innovations such as the
addition of Rande Gerber’s Whiskey Sky bar and Whiskey Beach at
Green Valley Ranch are bringing in a younger audience and drawing travelers
away from downtown and the Strip, says Glenn Christenson, Station Casinos’ executive
vice president and CFO. That is important at a time when Las Vegas’ unemployment
remains at 5.3%—high for local standards—and senior citizens
are feeling a pinch in the discretionary income in the
face of soft investment markets.
The Maloof family’s 450-room Palms represents another trend—away
from the Strip and the mega-hotel experience to something more intimate
and higher end. Owner George Maloof says this “themeless, brandless
casino” was designed to straddle a mixed market of locals and
tourists, with a “locals” zone on one side and a visitor
zone on the other. “Locals want value in restaurants, a good coffee
shop and good buffets. They want value in the gaming area, especially
video poker. Tourists tend to want great restaurants, a movie theater,
a spa—in other words, they want reasons not to leave the property,” Maloof
says. Although he sees spending increasing on the non-casino side, he
predicts few casino hotels can maintain a 50/50 revenue mix; most would
be closer to 60/40. “Casino hotels have malls. They have great
restaurants. What more can they do?” he questions.
Challenges Ahead
|
The next 18 months will be the test for the inventiveness
of Las Vegas’ operators. Though some projects were shelved after
last year’s terrorist attacks, Wynn is muscling his way back onto
the Strip with La Reve, scheduled to open in 2005-06. Bellagio is adding
a tower, giving MGM MIRAGE time to weigh various concepts for an undeveloped
55-acre (2.2-ha) parcel. Millennium Management’s 201-room Cannery
Hotel & Casino is slated to open in 2004, while Mandalay Resort
Group and Las Vegas Sands proceed with expansion programs
scheduled for completion in 2003.
There is some specter of further consolidation,
but most maintain that it would involve single assets or small portfolios
of assets. The greater near-term concerns center on operational issues
such as taxes and energy costs. In addition, the Nevada gaming board
is considering a proposal that would block casino operators from controlling
more than 10% of a statewide gaming market and no more than 60% of
a distinct local market. Minor points out that some companies had
to absorb 25% increases in energy costs last year and will likely
see rate increases this year and next. “In Atlantic City, the influx of new supply over the
next several years could cause operators to reconsider their promotional
and marketing strategies as well as their labor situation,” she
adds. “New competition historically has led to increased promotional
spending and higher compensation costs for employees.”
A projected shortfall in Nevada’s state budget threatens to increase
casino taxes moving into 2003-04. Though Ader and others doubt the state
would levy prohibitive increases on an industry so vital to the state
economy, casino hotel operators are carefully monitoring legislative
debate. “We are not a bag of money waiting to be squeezed,” Feldman
says. “We are willing to contribute reasonably to the tax base.
The gaming market already shoulders about half the tax bill. We would
like to see a comprehensive tax plan. It is well past time for other
businesses to start paying their fair share.” Illinois already
has raised its gaming tax, as has Indiana.
The issue of taxation on Native American casinos
is surfacing on the U.S. East Coast and in California. “Native American gaming is
always under attack in terms of taxation,” Brown says. “The
industry needs to understand sovereignty. It also needs
to know we are already paying 25% of our slot revenues to the state
of Connecticut.”
The state of the U.S. economy is the underlying
concern for all casino hotels. Even with the fast turnaround of markets
outside Las Vegas and continued recovery in the U.S.’ gaming
epicenter, operators continue to look for ways to increase frequency,
expand bread-and-butter regional business and bolster non-casino yield.
View All Blogs
