Bad hold, tough competition plague Rio

David Strow

Thursday, July 19, 2001 | 11:08 a.m.

Since late 1999, the Rio has looked a lot like a hard-luck gambler taking a pounding at the tables.

For six of the last seven quarters -- including the quarterly results reported Wednesday -- the Rio's tables haven't won nearly as much from gamblers as company officials and investors expected. And each time, that factor -- "poor hold," as it's usually called -- has impacted the earnings of Rio owner Harrah's Entertainment Inc.

Poor hold is usually equated with bad luck, and that's been the implication in the past when the Rio posted poor results.

"If one guy comes in and beats you for $5 (million) to $6 million," said Tom Jenkin, general manager of the Rio and Harrah's Las Vegas, "that takes the starch out of your month."

But there's more to it than atrocious luck, gaming industry observers say. As Las Vegas casino owners have known for decades, the longer players stay at the tables and the slots, the more likely they'll lose greater and greater amounts of money to the house. The casino doesn't rely on luck to make a profit -- the house relies on the crushing inevitability of statistical probabilities.

Bad luck goes away with time. At the Rio, bad hold hasn't.

"So much of the gaming industry is statistics," said Gregory Gale, chief of the audit division of the Nevada Gaming Control Board. "We know that blackjack or baccarat, dealt in a certain manner, should hold a certain amount of money. If it isn't holding up to what the expected levels are, that is a warning flag."

When hold is chronically low, the control board becomes concerned, Gale said, though he wouldn't say if the board is specifically examining the Rio situation. The board's main job is tax collection -- and low hold means lower tax receipts.

"We look at the Rio every month, just like every other casino, and if they're performing consistently below their own benchmarks or the industry's, we will react to that," Gale said.

Hold is a relatively simple statistic -- the amount of money a casino wins from players. The hold percentage tells how much the casino won relative to the amount of money players put into play (the "drop.")

From 1997 to 1999, hold at the Rio's tables averaged about 20.5 percent -- and over that time period, high-end play was an even bigger component of the Rio's casino results than it is now. Over the last 18 months, hold has averaged 13.3 percent.

The painful difference between two percentages becomes very clear when put into actual numbers.

In 1999 strong hold helped the Rio post cash flow of $97 million. In 2000 when hold was weak, cash flow was just $29.3 million. The Rio's already beaten that mark over the first six months of 2001, but Harrah's is telling investors to expect the property to produce only $60 million in cash flow in 2001.

So what changed from 1999? The environment for the high-end player, Loveman said.

Loveman calls the current environment of high-end play in Las Vegas "bad economics" -- one that requires hold to be above normal before the casino makes any appreciable profit at it. If hold drops below normal, the effect on net income can be "corrosive," Loveman said.

"It's a combination of high-cost programs to drive high-end business and significantly lower hold," Loveman said. "We have done exhausting and exhaustive analysis ... and we don't believe that business is profitable on net in the long-term."

Harrah's investors had heard that before in earlier quarters, so low hold's return frustrated some analysts. Loveman assured them the company would move along more quickly now -- and hinted that the slow pace of the change may have led to the recent management shake-up at the Rio.

"The attention (non-high-end businesses) have received has been less than I would have liked," Loveman said.

Rio division president Jay Sevigny and general manager Cary Rehm resigned July 9, and were replaced by Jenkin.

However, the Rio's new boss cautioned that high-end business will still be welcome.

"We'll welcome the $5,000-a-hand, $10,000-a-hand bettors with open arms," Jenkin said. "But we're not going to deal to the $100,000-to-$150,000-a-hand bettors, because there aren't enough of them. The Rio will be in the high-end business, we're just at a different level than the Mirage or the Bellagio might be.

"When you live in that realm of volatility, you can have a year or two when you look pretty good, and a year or two that look disastrous."

Making money at the high-end isn't just a problem with the Rio, said Shannon Bybee, executive director of UNLV's International Gaming Institute. A casino manager, under pressure to keep the casino's drop up to expectations, may entice high-rollers to play by offering them a substantial chunk of their gambling losses back as a rebate. As competition increases, so do these rebates, along with other comps offered to high rollers.

"Sometimes they make them (the table games) unprofitable, just because they want the drop," Bybee said.

Ironically, however, the Rio is drawing flak from some gaming industry observers for not giving the premium players enough.

As an independent property, comping decisions at the Rio were made by individual managers. Under Harrah's, the Rio has been placed within "Total Rewards," the company's cross-country frequent players card. Under Total Rewards, all comping decisions are made by complex computer programs, and players are slotted into one of three levels. Each level offers a higher level of comps.

"From a prudent point of view, they're going in the right direction, but they're (angering) the customer who doesn't get it," said Anthony Curtis, publisher of the Las Vegas Advisor newsletter. "A lot of people hate the system right now. They feel Harrah's is tightening up all over the place.

"Is that enough to cause the effect at the Rio? Maybe. Something's going wrong in the organization to have hold go down like that quarter after quarter."

Jason Ader, gaming analyst with Bear Stearns, was more diplomatic.

"Tony Marnell (the former owner of the Rio) was involved in the Rio ... and he had a gift for understanding what worked at that point in the market," Ader said. "Any time you go from an entrepreneur to a corporate owner, you run the risk that product will become institutionalized."

Jenkin flatly denies the Rio hasn't been treating its high-end customers properly.

"I don't believe there's any validity to that at all," Jenkin said. "If you're a customer on that end (the high end), there is no program. You take care of whatever they need."

Whatever the cause, the Rio is suffering because of increased competition, Ader said.

"Clearly with Mandalay Bay, Bellagio, Venetian, Paris and Aladdin opened after the Rio (acquisition by Harrah's), it made it that much harder for them to compete," Ader said. "In every market segment, they've seen dramatic increases in competition.

"Tony Marnell deserves credit for creating a product everyone copies. Ultimately, that's what's hurt the competitive position of the Rio. With the Palms (the Maloof family-owned casino set to open near the Rio in December), that's just going to further the issue the Rio faces ... what its identity is to Strip customers, how it's going to compete for local business."

When Harrah's bought the Rio, it was producing about $100 million in annual cash flow. On Wednesday, Harrah's told investors to expect $60 million in cash flow this year -- and Ader believes the property probably will settle into a range between $60 million and $75 million a year.

"I would have been surprised if Harrah's management team had said they're paying ($880 million, the Rio's acquisition price in 1999) with the expectation cash flow would decline," Ader said. "If you go back to the original expectations, it's a disappointment."

But Harrah's executives are vowing the Rio's days of decline are at an end.

"The Rio will have a better year in 2001 (than in 2000), and it will continue to have a better year in 2002," said Phil Satre, chairman and chief executive officer of Harrah's. "Of that I'm quite confident."

archive