Harrah’s distances itself from gaming’s standard growth strategy

Gary Thompson

Wednesday, May 20, 1998 | 10:26 a.m.

Harrah's Entertainment Corp. told investors Tuesday it's going back to basics in pursuit of growth.

Eschewing the strategy pursued by competitors that build casinos to create demand, Harrah's said it will stimulate business by recognizing and rewarding its best players.

"Many of our competitors are focused solely on the supply side of the gaming business and are building new properties," Harrah's Executive Vice President Colin Reed said at a CIBC Oppenheimer conference at the MGM Grand.

"But we are focused heavily on demand. We want to know how people play and where people play.

"Our strategy to build shareholder value is based on identifying our best customers and supplying them with compelling reasons to play at Harrah's."

Reed said research revealed 26 percent of its best customers -- Harrah's calls them "avid experienced players" -- generate 82 percent of casino revenues and make twice as many visits to casinos each year as average players.

If those "AEPs" also gamble in more than one geographic market, they generate three times the casino revenue of single-market players, he said.

Reed said Harrah's wide geographic distribution -- it owns or operates 15 casinos nationwide and is acquiring Showboat Inc. and its Las Vegas, Atlantic City, Midwestern and Australian casinos -- is a key element in the growth strategy.

"We have the ability to leverage that distribution to capture more AEPs through penetration of regional markets," he said. "We try to put our business near where our customers live."

While the Showboat acquisition will advance that strategy in other markets, "the Las Vegas Showboat doesn't serve the customers we're looking at and is not a strategic asset," Reed said. He didn't elaborate.

Reed said Harrah's investment-grade credit rating will enable it to acquire additional properties in desirable markets through a low cost of capital.

Player recognition and reward programs such as Total Gold, modeled after airline frequent-flyer programs, "give players a reason to play Harrah's," he said.

Noting the capacity problems afflicting most existing casino jurisdictions, Reed said, "We believe growth and competitive advantage will come from those who concentrate on the demand side, not the supply side."

The Harrah's strategy contrasts with that of other operators at the Oppenheimer conference who said creating new mega-resorts will stimulate demand.

Circus Circus Enterprises Inc., for example, outlined a plan to build billions of dollars in additional properties along the Las Vegas Strip and in Detroit and Atlantic City after its $950 billion Mandalay Bay opens here next spring.

Circus President Glenn Schaeffer said the openings of Mandalay Bay and Mirage Resort's Bellagio, Hilton Hotels' Paris and Sheldon Adelson's Venetian over the next 18 months will lure more visitors to Las Vegas.

"This next round of 12,500 rooms being built here will be the most dramatic hotel introductions in the history of the world," Schaeffer said. "They will drive attention to Las Vegas."

But Harrah's Reed said the $7 billion of hotel construction planned in Las Vegas over the next five years and another $3 billion earmarked for Atlantic City will create "vulnerability in the supply-and-demand balance and put pressure on companies in those traditional markets."

Hollywood Park Inc. Chief Financial Officer Michael Finnigan said there are still opportunities elsewhere, however.

"We're looking to consolidate small-cap gaming companies outside of Las Vegas and Atlantic City," Finnigan said.

Meanwhile, Schaeffer, Mirage Chief Financial Officer Dan Lee and Caesars World Chairman Peter Boynton said increased convention and retail space will help boost Southern Nevada visitor volume by helping redefine Las Vegas as a destination.

"Within a mile of Flamingo Avenue and the Strip, Las Vegas will have more retail space than the 4.2 million square feet at the Mall of America, where Lufthansa flies shoppers in from Germany regularly," said Lee.

"We'll have better shopping here than in Southern California, and we ought to consider telling Southern Californians to do their Christmas shopping here," he said.

Boynton said Caesars' recent expansion of convention space is "already booked solid for 1998," and is generating surprising revenues.

"These are people who'll spend $250,000 on a pool party and will pay high room rates," he said. "It's a good business, especially when there isn't anything better to take its place."

In the past, many casino operators turned away convention business, believing attendees rarely gambled.

"Now, the value of lower-end casino customers versus high-end room customers is a yield-management question that technology will help resolve," Boynton said.

Station Casinos Chief Financial Officer Glenn Christenson said the company, which is merging with Crescent Real Estate Equities, will use its increased financial strength to further consolidate the locals' gaming market in Las Vegas.

Station already controls about 42 percent of that market, he said, and is planning expansions at its Sunset and Texas Station properties. It has also acquired the King 8, plans a project on 27 acres near Sam's Town on Boulder Highway and is competing for control of the bankrupt Arizona Charlie's.

"We'll focus on the Las Vegas locals market, but will look at the Strip if our investment criteria are met," he said.

The Station merger with Crescent, a real estate investment trust, and Starwood Hotels & Resorts Worldwide's acquisition of ITT Corp. have created speculation REITs will buy more gaming operators.

"I don't see REITs winding up with control of the gaming industry because not all casino companies are capable of providing stable cash flows," Christenson said, citing the volatility of the casino business.

Harrah's Reed agreed.

"It's no accident REITs have different multiples from gaming companies," he said. "Gaming is a very risky business, and at the end of the day, the question is how do REITs get comfortable with casino cash flows."

A panel of gaming-equipment makers agreed that the trend toward revenue participation -- adamantly opposed by casino operators who prefer to buy, not lease, slot machines -- is accelerating due to player demand for new, more exciting games.

"We're knocking down that old taboo one brick at a time," said Randy Adams of Anchor Gaming. "It's happening very quickly."

"Casinos lease restaurant and retail space all the time," said Richard Irvine of Mikohn Gaming. "Why not lease game space?"