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Wednesday, 07 September 2011 13:12

High stakes casino expansion tests the theory: If we build it, will they come?

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When a new federal law in the 1990s opened the door for Indian tribes to build casinos, it set the stage for economically-depressed reservations to become masters of their own destiny, to create wealth where none existed before and improve the quality of life for their people.

“Some have and some haven’t,” said Darold Londo, general manager of Harrah’s Cherokee. “Cherokee was willing and able to make tough decisions that didn’t come easily within the tribe. They were wise and courageous to have done what they did.”

While the casino appears from the outside to be a shining beacon of money, launching the enterprise took more than flipping on an “open” sign and watching the money roll in.

“It took a lot of smart, difficult work with a lot of people in the tribe and Harrah’s to market this operation,” Londo said. “It blew the expectations of the tribe and Harrah’s away. It was more successful than people had ever expected.”

A decade later, Cherokee found itself once again at a crossroads. Since the casino first opened in 1997, there had been growth spurts followed by plateaus.

“We knew there was another plateau coming,” said Principle Chief Michell Hicks said. “At some point, like any product, it gets stale. The customer loses interest. If you don’t keep it fresh there is a risk of losing the customer base.”

The risk of doing nothing — of watching the casino grow old and tired — seemed much worse than the leap of faith by the tribe to go for another expansion.

“It is making sure the casino stays ahead of the customer wants and needs but also make sure we can push the profit level as high as we can possibly can,” Hicks said.

The tribe embarked on a massive $633 million expansion in 2007 to remake the casino and hotel into a luxury resort.

Since then, however, the recession has taken its toll on casino profits. Revenue fell for three consecutive years following a high in 2007. Cherokee was not alone. The trend was industry-wide.

But the decline led many in the tribe to question whether the massive expansion was ill-conceived.

The outlook is improving. Profits are up 10 percent for the first six months of the year over the same six months last year. It’s a sign perhaps not so much of a better economy, but that pieces of the expansion coming on line: the third hotel tower is humming, the concert venue is in full-swing, new restaurants are opening every few months.

 

Was it worth it?

A big question still looms in the minds of tribal members: was the expansion worth it? It came at a cost — $633 million to be exact. And now the tribe must pay off that debt using its cut of casino profits.

The expansion must reap enough new business to justify the cost — otherwise it could hurt the tribe’s bottom line instead of help, the massive debt eating away at profits.

But that seems unlikely.

“Any business decision you will look back and say ‘should we have done it, should we have not,’” Hicks said.

But for Hicks, he still believes it was the right move, particularly given the bargain interest rates the tribe could get.

As for the recession, however, Hicks admits the timing wasn’t ideal.

“With regards to the economy it didn’t match up as well,” Hicks said.

Cherokee is smart for remaking the casino into a resort, according to Vin Narayanan, a national casino industry expert and managing editor of Casino City Press.

Had Cherokee remained static and not pushed for a massive expansion, its outlook five years from now would not be good. The casinos faring poorly right now are those offering little to guests other than a gaming floor lined with slot machines.

But resort-style casinos, with onsite hotels, shopping and dining: “that has been a proven formula for success,” Narayanan said.

Cherokee had been somewhere in between: not a simple slot-parlor, but not a full-fledged resort either. The new resort amenities will not only attract new guests, but also younger guests.

It will also diversify their revenue stream. Less than a decade ago, 80 to 85 percent of revenue for Vegas casinos came from the gambling side.

“Now it is almost 50-50. Almost half their revenue is coming from dining, hotels, the shopping, that whole thing,” Narayanan said. “It is not just about gaming.”

Cherokee’s casino competition doesn’t just come from Atlantic City, the Gulf Coast or Vegas. It is competing against cruise lines and Disney World — the whole sphere of entertainment dollars.

At least revenues are climbing again now. If not for the expansion, they could be flat or still dropping.

Londo predicts the Cherokee casino won’t get back to past profit levels until 2012 — three years ahead of the rest of the industry.

“In the industry they are not projecting a return to those types of levels until 2015. That is a testament to the capital investment in this property that we’ll return much sooner to previous levels,” Londo said.

Hicks points out that 2010 would in fact have held steady from 2009 if not for three bad months in the winter, when Cherokee was surrounded on three sides by landslides blocking the way to Western North Carolina. Rockslides shut down Interstate 40, U.S. 64 and U.S. 441, essentially blocking all routes to Cherokee from points west.

“We had some variables there we couldn’t control,” Hicks said.

 

Protect the monopoly

While the economy has tempered the tribe’s hopes for the expansion, things could be much worse: gambling could be legalized in North Carolina or a surrounding state.

That should be the tribe’s biggest fear, according to Narayanan.

“States are in a world of hurt from a revenue standpoint,” Narayanan said. “If the North Carolina budget becomes bad enough, they might bring in an industry that is willing to get taxed at a ridiculously high rate. A few hundred million in revenue starts to look pretty good.”

That’s exactly what’s happened in some New England states, putting a major dent in Atlantic City’s monopoly, and thus its profits.

“It is like McDonald’s and Burger King, there is a finite amount of fast food revenue that the industry is competing for,” Narayanan said.

Closer to home, the state of Ohio sanctioned four casinos in the throes of recession budget woes. Each will rival the number of games offered at Cherokee, and two are resort-style casinos carrying a construction price tag of close to $1 billion.

As the only game in town, Cherokee has a clear advantage. The next closest casino is a day’s drive any way you slice it: the Mississippi River, the Gulf Coast, Atlantic City, or the many casinos run by northern and mid-western Indian tribes, from Oklahoma to Iowa.

But that advantage only goes so far. The rest has taken the blood, sweat and tears of an entire tribe to realize.

“The thought that we aren’t in a competitive market based on our geography is a false perception,” said Londo, general manager of Harrah’s Cherokee. “There is a percentage of gamers that are relatively promiscuous. They will travel to the right environment for them. In some cases, it is just as easy to hop on a plane. Nobody has the lock on that business, even if they have a geographic advantage.”

The lack of competition can even be a turn-off. Some gamers like the action of casino-hopping.

“Some people if they are going to make an effort to game they want options and choices,” Londo said.

Cherokee’s sprawling casino expansion does its best to make up for that.

“Here we were very deliberate in creating zones, so it had a different look and feel because people do want that change in scenery,” Londo said. Different lighting, different music, a different mood — and different luck.

The marriage between the tribe and Harrah’s has been a happy one. Harrah’s brings the expertise and know-how to running a casino. The tribe benefits from its name recognition and cross-marketing of other casinos.

In return, it gets a management fee, based on a percentage of the profits.

“As we’ve grown in our capabilities, Harrah’s has learned as much from us as we learn from them,” said Erik Sneed, construction oversight liaison for the expansion. “We’ve been very smart in the way we do our business to stay ahead of the curve.”

Ultimately, Harrah’s is a corporation, while the tribe is beholden to social, cultural and civic goals. Their goals aren’t mutually-exclusive, but there are differences, Londo said.

“What you will find inherent for tribes is they want to prevail over a longer period of time, whereas companies beholden to Wall Street want to focus on short-term results,” Londo said.

Cherokee is more interested in ensuring revenues will still be strong five years from now and less concerned about the current state of business affairs, Londo said. And the tribe also wants to provide jobs for tribal members and see them promoted in the company.

 

In the trenches

When 46-year-old Londo took the helm at Harrah’s Cherokee in 2006, the tribe was eyeing an expansion in the neighborhood of $400 million.

Not big enough, Londo thought. He believed Cherokee had more market potential than that. It meant “going bigger, and a lot bigger in some cases,” Londo said.

But there’s a fine line.

“Nobody wants to be in a facility that feels empty, that lacks excitement and enthusiasm,” Londo said. “If you were going to err you would err on the side of being just a little smaller than a little too big. It feels energetic.”

Londo has Ojibwa ancestry, though he didn’t grow up on a reservation. His parents ran a restaurant in Milwaukee. His first memory is as a five-year-old boy, filling an ice chest in Londo’s Lounge.

He went to West Point, and became a captain in the military, flying Cobra attack helicopters and then training other pilots. He got his MBA on the side, then quit the service and went to law school. After working 10 years in the field of business law, he landed a job with Harrah’s in Atlantic City 2002 and rapidly rose through the ranks.

Londo is cool and calm by nature, to be expected from his West Point education and military training. He exudes the virtue of self-discipline.

The expansion on the horizon was a major drawing card for Londo to leave Atlantic City and move to comparatively rural Western North Carolina.

Londo lives in Sylva with his wife and three kids, ages 12, 16 and 17. As far as the family is concerned, it stacks up to their past life just fine.

“My wife probably enjoys it the most. She says if you have a Wal-Mart and a Lowe’s you are good-to-go,” Londo said.

“I would have been a lot less excited to come here if Cherokee wasn’t on the eve of exploiting its growth potential,” Londo said.

Londo instantly immersed himself in the master planning for the expansion.

No decision seemed to small for Londo to weigh in on. Where should valet parking drop-off be? How many seats should the buffet have, or the concert venue? Which would be better, a new Italian restaurant or a steak house? As for retail, a ladies footwear shop or consumer electronics?

A master planning committee of the casino’s top management and architects had their own “situation room” dedicated to the expansion, where such details were hashed out.

“There was a time when I was in design, construction and right-sizing type meetings three-and-a-half days a week,” Londo said.

But it was his forté and he loved it.

“The military trains you to plan, plan, plan. Planning is important,” Londo said.

When the tribe set its sights on a major expansion of the casino, one of the first steps was a critical casino-hopping tour in Atlantic City to check out the competition. Far from a sightseeing junket, however, the team had a rigorous itinerary, visiting several casinos a day with notepads in hand.

Those on the trip each had their own take-away goals. Rather than honing in on the price points for buffet menus, Sneed was on a big-picture quest.

“For me, it was about the quality of the experience. How do you design a space that is beautiful and fabulous but is still functional?” Sneed asked.

He also wondered how amenities were integrated into the gaming floor. Restaurants and shops were one thing the casino lacked, and in addition to sheer square-foot expansion of the gaming floor, the amenities would be a major focus of construction.

How are drink windows tucked in to the gaming floor? How close does the food court come to the tables?

The master plan team didn’t close the books once ground was broken. They were constantly refining.

“That blueprint or playbook that you established isn’t set in stone, so as conditions change you can adapt to it,” Londo said.

Most notably, the advent of alcohol. Talk about a game changer. The casino was dry — like the rest of the reservation — until just last year. Plans were rapidly redrawn to include bars and walk-up drink windows on the gaming floor.

The recession also led the casino to scale back the square-footage for the spa.

The expansion is taking the casino from 1,600 to 2,400 employees. Londo makes an hour each week to drop in on the new hire training sessions — averaging about 30 new hires a week right now.

“How are we expanding when the rest of the economy is contracting?” Londo asked after hitting the highlights of the expansion. “It’s magic. We can’t figure it out either.”

Cherokee is consistently a top performer out of 17 Harrah’s casinos in the country. Once a week, the general managers from every Harrah’s hold a conference call to compare numbers.

Likewise, Londo reports to his boss at Harrah’s corporate headquarters almost daily. Londo has goals to meet — not just for the year, but every month and every weekend. Every Monday, his boss wants to know: how was weekend performance? Did you meet your goals? Did the promotions do as well as expected?

“If not, what do we do about it?” Londo said. “That’s how myopic we get.”

It’s hard to gauge just how high the bar should be for Cherokee. Harrah’s expects growth from one year to the next, but setting revenue goals has been complicated by the economy, with even the most well-versed industry experts flummoxed over how much of a hit casinos could expect in the recession.

But in Cherokee, it’s been doubly complicated. Will new revenue from the expansion off-set the recession? Or for that matter, finally introducing alcohol?

Londo flipped an imaginary coin in the air with his thumb when asked how Harrah’s even begins to set profit expectations for a property in such flux. But he quickly donned his business demeanor and returned to casino-speak.

But Londo’s remaining time in Cherokee is probably short. With the expansion due for completion next year, Londo is looking for that next move.

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