Harrah’s CEO bullish on gaming, LV

David Strow

Tuesday, Jan. 9, 2001 | 11:24 a.m.

Investor and analyst confidence in the Las Vegas market has been on the wane since October, as visitor growth declined and fears of a national recession grew.

But the chairman and chief executive of one of Las Vegas' four giants of gaming, Harrah's Entertainment Inc., insists he's as optimistic as ever going into 2001. Gaming is more accepted and prevalent than ever before, and more and more Americans are moving into the 45-and-older category, a group with time and money to spend in casinos.

To back up his bullish outlook, Phil Satre said Harrah's is busily drafting plans for a huge expansion of the Rio hotel-casino -- and Satre said construction could possibly begin sometime this year.

"I haven't felt better about this industry or this company on any other Jan. 1 more strongly than I did on Jan. 1, 2001," Satre said in an interview last week.

"We continue to see widespread, significant acceptance of this industry, and it's clearly gotten stronger over the last 10 years. The very tight (job market) is good for our industry, and I don't see that going back to the (unemployment) levels we saw in the early '80s in 2001 or 2002.

"Everything is moving in this industry's direction. This is a year I feel very good about."

Harrah's has been discussing expansion of the Rio for at least a year. But since that time, the Rio has had a series of disappointing quarters, and the prospects for growth in the Las Vegas market have grown increasingly dim.

Still, Satre sees opportunity in an expansion of the 2,563-room property. He's not discussing many details, saying only that such an expansion would include the addition of a third room tower. Other items being considered include the addition of new retail space, restaurants, convention space and casino space -- and perhaps a big remodeling of the property. No start date for such a project has been set.

"I consider (expansion) as an opportunity, taking advantage of its strong reputation," Satre said. "It is still the hip spot in Las Vegas, a great night spot. There isn't a casino in this city that resembles the Rio in makeup ... the hip image is something we can build on."

But one thing the Rio must do, Satre said, is build its appeal to the "Total Rewards" customer -- the group of 20 million customers who carry Harrah's players club card. Part of the system is built on ensuring that Total Rewards customers who play at Harrah's casinos across the country stay in a Harrah's property when they come to Las Vegas.

Total Rewards is a tiered system, awarding customers progressively more attractive perks and comps as their status rises from "Gold" to "Platinum" and then to "Diamond" -- a status based on their wagering activity. Harrah's uses the data received on a customer's play to make offers tailored specifically to a customer's playing habits, tastes and demographics.

Total Rewards customers flock to Harrah's Las Vegas, Satre said, but it doesn't have the room to handle all of the Total Rewards-generated demand. The next stage is making the Rio attractive to those customers as well, so customers aren't lost to the competition in Las Vegas.

"One thing we can build on (at the Rio) is the Total Rewards cross-market visitor," Satre said. "We have slot customers, from throughout the U.S., that we can make the Rio attractive to."

The Rio has shown signs over the past year that it could use the boost, as poor quarters recently at the property hurt Harrah's earnings. In the quarter ending Sept. 30, the last reported by Harrah's, cash flow at the Rio fell 65 percent, while revenues dropped more than 13 percent.

Part of that, Satre said, has been an issue of poor hold at the Rio's tables.

"We have the happiest customers in the world," Satre said wryly, "because Lady Luck was kind to them."

But Satre also acknowledges that the Rio faces a challenge beyond poor hold. For years the Rio stood alone as a hip night spot, based on its restaurants and nightclubs -- but now, the Rio faces fierce competition in that category. Part of the strategy has been shifting the Rio from the volatile high-end to the middle of the gaming market.

"The Rio is evolving in a different competitive environment," Satre said. "The competition changed drastically. (But) I feel very good about the Rio's prospects in 2001 and 2002. I'm highly confident we will have better performance in 2001 than in 2000."

The eventual expansion and refinement of the Rio is part of an ambitious capital expansion plan by Harrah's -- in 2001, the company estimates it will spend between $475 million and $525 million on capital expenditures, with expansion projects at all 21 of its properties.

"We've never had this much activity within our company ... it isn't just Las Vegas," Satre said.

Though most growth will be in the expansion of existing properties -- "organic growth," at Satre calls it -- he acknowledged Harrah's remains interested in growth through acquisitions, both in Las Vegas and elsewhere. But he declined to discuss possible targets, including speculation that Harrah's might be interested in acquiring the Imperial Palace on the Strip from Ralph Engelstad.

Part of the attraction in expansion through buyouts, Satre said, is the ability to integrate the Total Rewards system into new properties -- and thereby boost revenues while investing relatively little in physical expansions. In Atlantic City, about 87 percent of revenues are derived from Total Rewards customers, while during the New Year's weekend at Harrah's Las Vegas, revenues from Total Rewards customers reached 89 percent at one point, Satre said.

When Total Rewards is introduced in newly acquired properties -- as it was in Lake Charles, La., in December -- the result is a "remarkable," nearly instant increase in revenues, Satre said.

"That demonstrates the power of Total Rewards," Satre said. "We drive same-store sales growth without capital improvement."

The link with Total Rewards was the motivation behind Harrah's heavy investments in National Airlines. Harrah's invested more than $57 million in National since its inception, and recently guaranteed a $16 million credit line to the airline from Bank of America. It owns 48 percent of the carrier.

Now that National has gone into Chapter 11 bankruptcy, that investment is at risk. Harrah's has said it expects to absorb fourth-quarter write-offs connected to National, but didn't specify how much.

Satre isn't optimistic about National's chances for survival.

"The outlook for that is very pessimistic, based on what I can see," Satre said. "The reason I'm pessimistic is we made a pretty concerted effort to attract capital, and my view is that there isn't much appetite to come in and invest in an airline.

"National will either continue to exist or become a nonrecurring charge (against earnings)."

Satre called the decision of other Las Vegas casino operators not to invest in National "a disappointment."

"I think it (National) was good for the city, good for the state," Satre said. "But I respect their right to make their own business decisions."

The thrust of Satre's argument to other gaming companies was that companies such as MGM MIRAGE, Mandalay Resort Group and Park Place Entertainment Corp. derived a far larger benefit from National than did Harrah's, since they have more hotel rooms in Las Vegas. Given that, why would Harrah's invest so heavily in National by itself?

Satre defends the investment, noting that the Total Rewards link meant that 10 percent of National's passengers were staying in Harrah's properties in Las Vegas, though Harrah's accounts for only 5 percent of the city's hotel rooms.

"That's very attractive," Satre said. "I still think it was an attractive marketing opportunity for us and it was working."

A second Harrah's investment that may have a better chance, Satre said, is Harrah's New Orleans. Harrah's owns 43 percent of JCC Holding Co., the casino's owner, and has guaranteed a $100 million annual tax payment to the state of Louisiana.

Harrah's has informed Louisiana that its guarantee will end March 31, and is trying to convince state and city lawmakers to lower the payment. In connection with these negotiations, the casino filed for bankruptcy last week.

If a deal can't be struck, Harrah's says the casino will be forced to close March 31.

"I think it could go either way," Satre said. "It could be up and running on April 1, and there's a likelihood of equal weight that it could be shut down.

"New Orleans is successful. There's not a lot of casinos that do $28 million a month (in revenues). We're proud of the casino, we're happy with the customer response. The reason I'm even pushing to go back there and fashion something new (is that) we have customers that really like going there, and we have 3,000 employees there who have worked really hard to make this work for the last 14 months."

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