Critics doubt Trop can cut its way to success

By Liz Benston (contact)

Friday, June 29, 2007 | 6 a.m.

When Columbia Sussex muscled aside other casino giants for control of Aztar Corp. and its Tropicana casinos, competitors were skeptical that a Cincinnati-area operator of midpriced hotels had the experience or flair to pull off a major renovation of the Tropicana - its biggest and most ambitious casino acquisition to date.

Months later, it's not just the company's plan to create Las Vegas' largest hotel and casino complex that has critics buzzing. Since acquiring Aztar in January, Columbia Sussex has laid off hundreds of workers - at least 300 people in Las Vegas alone - as part of a strategy to slash operating costs.

Besides angering workers, the layoffs are riling unions and lawmakers and attracting scrutiny from regulators.

And that concerns other casino operators, who depend on friendly relations with these groups to grow and flourish.

Although mass layoffs are common in other industries, they aren't typical in the service-intensive casino business .

Because each property can employ thousands of workers, job creation and tax revenue have become major justifications for legalizing casinos across the nation.

In this highly regulated world, layoffs that might otherwise be routine can become politically significant - especially in smaller communities more dependent on a single property.

The problem is partly a function of the company's history.

Columbia Sussex is a privately held, family-run company accustomed to keeping its business strategy quiet. It is uncomfortable with the kind of scrutiny that comes with the territory, and by its own admission, it is not skilled at responding to controversy.

Columbia Sussex entered the casino business in 1990 with the purchase of the Horizon at Lake Tahoe. With the four-casino Aztar deal, the company's gaming arm, Tropicana Entertainment, operates 12 casinos in six states.

But the company, founded in 1972 by Chief Executive Bill Yung, is primarily a hotel operator with more than 80 nongaming hotels in the United States, Canada and the Caribbean. It also is the nation's largest operator of full-service Marriott hotels.

With those roots, some critics say the company is employing strategies perhaps better suited to the more straightforward business of running hotels than the more service-intensive casino business.

The layoffs - striking at all levels, from management down to rank-and-file kitchen workers, housekeepers, slot workers and dealers - may have cut too deep.

Anna Sotelo, a waitress at the Tropicana for the past 20 years, said she struggles to serve customers with half the amount of normal staff on the floor and in the kitchen.

Dennis Dunigan, a utility worker at the Tropicana for 12 years, said his workload has increased threefold. He no longer cleans carpets and upholstery, but instead is relegated to the immediate task of picking up trash in the casino.

"The quality at the casino level has dropped tremendously," Dunigan said. "The Trop was known as the Tiffany of the Strip at one point, and now we're worse than Wal-Mart."

Yokasta Diaz, a porter at the Tropicana for five years, said workers are short on supplies. She carries her own screwdriver and plunger, sometimes floating to other departments to cover understaffed shifts.

"You have a lot of people that have known everybody for years," Diaz said. "It's teamwork. Now we are so spread out we can't help each other. It's sad."

Columbia Sussex spokesman Hud Englehart said the company is making necessary cuts that in some cases began before the takeover.

When companies were bidding for control of Aztar, competitors were anticipating layoffs as a way to help pay for the purchase of a company with some of the most inflated employee rolls in the industry, Englehart said.

"We're just like any other business, trying to align the workforce with the operations of each property," he said. "We're in business to provide great customer service but we do it as efficiently as possible."

For example, in Atlantic City, just before the takeover, the Tropicana employed about 4,500 workers to Harrah's 3,400 in December - and generated $50 million less revenue than Harrah's, according to New Jersey figures.

Although some employees lose their jobs in the short term, the result is a stronger company with long-term growth opportunities for those who remain, he said.

The speed and depth of the cuts has alarmed regulators in New Jersey and Indiana, who are investigating the layoffs. Gaming regulators generally can't dictate staffing levels and don't get involved in business decisions unless they affect a casino's ability to comply with money-handling rules and other specific regulatory requirements. But they can exert political pressure.

In Nevada, where the Tropicana represents a small fraction of Las Vegas' casino base, regulators haven't stepped in. Layoffs haven't hurt compliance efforts, they say.

The company's latest earnings report offers some evidence of its controversial strategy at work.

At the Tropicana in Las Vegas, revenue was down slightly for the first three months of the year compared with a year ago. But profit was up by more than $2 million, or 23 percent. Its other casinos followed the same trend, with profit rising slightly against a backdrop of declining revenue.

Some gaming experts call it a Wal-Mart approach to management.

Rather than risk overspending on marketing or attractions that might not yield business, the strategy involves offering minimal amenities and decent-enough gambling odds to draw repeat business.

"It's the old 80-20 rule, that 80 percent of your business comes from 20 percent of your customers," one operator familiar with Columbia Sussex said. "Chasing after that extra 20 percent is less profitable and maybe not worth the effort. You end up giving up revenue that doesn't have much profit associated with it."

Dennis Farrell, a bond analyst with Wachovia Capital Markets, said it's a more complex strategy that will take at least two years to play out.

While cuts are helping pay down debt on its $2.8 billion Aztar purchase, the company is strategically spending money, even hiring, in a few areas, he said. In Atlantic City, the company is upgrading the casino with a newer, Havana theme of its retail and entertainment mall. At Lake Tahoe, the remodeled and renamed MontBleu Resort is a top property, he said.

"They're very focused on profitability and, being private, I think they have the ability to move faster than a public company," Farrell said.

A plan to add hotel towers for a total of 10,000 rooms, up from the current roughly 1,900, at the Tropicana in Las Vegas also goes against the grain. But it makes some sense, he said.

"They're going to go after the mid- to upper-tier business customer, be a dormitory for conventions," Farrell said. "While other properties are charging much higher rates the Tropicana is going to be affordable. They're not going to charge $400 for rooms."

Casino consultant Jeffrey Compton is among the skeptics.

"They've bought some over-the-hill performers in competitive markets," he said. "They have a tough row to hoe. But that means you need a really sharp gaming mind to turn them around. I just don't know if they have the background to do it."