Park Place’s Paris avoids cannibalization of LV properties

David Strow

Friday, May 12, 2000 | 11:17 a.m.

Same-store winnings decline

While analysts say the Paris resort didn't steal business from other Park Place properties, there is some cannibalization still occurring on the Las Vegas Strip.

Analyst Brian Egger at Donaldson, Lufkin & Jenrette says "normalized gaming win" by Strip casinos in operation before the openings of Paris and the Venetian fell about 1 percent in March from March 1999 to $354 million.

Including Mandalay Bay, the Venetian and Paris, the Strip win was $414 million.

This March cannibalization, however, was modest and wasn't as bad as the 5 percent to 6 percent same-store gaming win reduction experienced in January and February.

When a new property opens on the Strip, one of the biggest risks a gaming operator faces is a phenomenon called "cannibalization" -- the risk that your regular customers will find your newest property so impressive that they stop patronizing your older ones.

But so far, Park Place Entertainment Corp. appears to be avoiding that fate with its newest creation, the $785 million Paris Las Vegas hotel-casino. Analysts say that's primarily because Park Place created a property that is distinctly different from its earlier offerings.

It isn't known how Paris performed individually in the first quarter ending March 31, since Park Place groups its earnings with sister property Bally's Las Vegas. But Paris-Bally's $58 million in quarterly cash flow was a $34 million improvement over the results Bally's produced in the year-ago quarter -- and that's credited almost entirely to Paris.

Just as significant to some analysts is what didn't happen at the Flamingo Hilton, located near the Paris-Bally's complex. During the quarter, the Flamingo reported cash flow of $33 million, up $1 million from 1999.

Analysts had considered the Flamingo to be the Park Place property at the greatest risk of the cannibalization effect because of its location.

"If anything, you could say (Paris) would impact the Flamingo, and you don't see that," said Joe Coccimiglio, gaming analyst with Prudential Securities. "I think it's pretty solid, those results."

Fresh in many minds, Coccimiglio said, was the impact the 1998 opening of the Bellagio had on its neighbor, the Mirage. During 1999, its first full year of operation, the Bellagio produced $1.1 billion in revenues and $169 million in operating income. But revenues at the Mirage fell 6 percent in 1999, while operating income declined nearly 40 percent.

The Mirage is now recovering, however, posting a 9 percent increase in revenues and 15 percent increase in operating income during the March 2000 quarter.

The reason cannibalization didn't take a big bite out of other Park Place properties was its marketing strategy, said David Anders of Merrill Lynch.

"This is a distinct enough product that you'll see it grow the business instead of cannibalizing neighborhood facilities," Anders said. "Relative to Bally's and Flamingo, (cannibalization) is just not the case."

In fact, Anders said, part of Park Place's strategy was to use Paris as a magnet for Bally's.

"The theory being, there's such high demand for Paris that Bally's would benefit from the overflow," Anders said. "If you can't get a room at Paris, you'll be transferred over to the Bally's reservation."

Analysts expect Paris to produce about $140 million in cash flow in 2000, translating to an annualized return of 17 to 18 percent on Park Place's investment.

"That's far superior to many new (Strip) properties that have opened (recently)," Anders said. "It's an outstanding concept, extremely well executed, but done with a certain cost consciousness in mind. It would have been very easy to spend a billion dollars on that project."

Without Paris -- and the subsequent acquisition of Caesars Palace -- Park Place's first quarter performance in Las Vegas would not have been nearly as impressive.

Overall cash flow in Las Vegas rose 67 percent, to $159 million. Park Place's three original properties -- Bally's, the Flamingo and the Las Vegas Hilton -- saw cash flow decline a combined $5 million for the quarter.

The culprit was the Las Vegas Hilton, where cash flow fell $9 million for the quarter, to $18 million.

But universally, analysts say there's nothing wrong with the fundamentals at the Paradise Road property, a favorite among high-rollers. Instead, the Las Vegas Hilton's tables enjoyed an incredible string of luck during the first three months of 1999, pushing cash flow to $27 million.

It wasn't something anyone expected Park Place to repeat.

"It's important for investors to realize that this (the first quarter of 2000) was more of a return to normalcy than anything else," Anders said.

David Strow is a business and gaming writer for the Sun. He can be reached at (702) 259-4069 or by e-mail at strow@lasvegassun.com.

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