Gaming the Market

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More than a decade ago, when controversy began to give way to inevitability, gaming proponents in Michigan exuded confidence that casinos would bring any number of benefits to the region and to investors, including Indian tribes, who would own most of them.

For the tribes, casino revenue would help pay for everything from education to medical care for their members. And for the various regions of the state, particularly the Detroit area, casinos would be a source of  jobs and would help keep residents’ entertainment dollars in the region rather than seeing them flee to Windsor, Atlantic City, or Las Vegas.

The notions of problem gambling and crime were hotly debated issues, but few questioned that the casinos themselves would make money.

That was then. As with so much else people thought they knew about economics, Michigan’s casino market has become the latest illustration of the maxim that there’s no such thing as a sure thing.

Michigan’s 22 casinos all remain in operation, and a 23rd is on the horizon. No one is suggesting that Michigan casinos have no future, or even that they don’t have a good chance of long-term success. But more competition is right around the corner.

“Compared to other states, Michigan isn’t as saturated as it relates to the percentage of slot machines to population,” says Jake Miklojcik, president of Michigan Consultants, a Lansing financial feasibility and public policy group, and a member of the Greektown casino management board.

Michigan’s economy has spared no one entirely, and many of the glitzy operations that were once considered cash cows have enacted sizable layoffs. A casino in bankruptcy is rather unusual, but it happened here in Detroit with Greektown Casino, which is scheduled to emerge from Chapter 11 this summer.

That, of course, will come as no surprise to anyone who’s paid attention to the Atlantic City market, where almost every casino is currently in some form of restructuring. Indeed, Donald Trump has practically turned the strategically engineered bankruptcy into a business strategy (with billionaire investor Carl Icahn’s money).

But it wasn’t what most expected when Michigan voters approved casino gaming back in 1996.

And, at least for some Michigan casinos, the challenge is about to become even more pronounced. Last November, Ohio voters passed a gaming ballot initiative allowing casinos in Cleveland, Cincinnati, Columbus, and Toledo. Livonia-based Quicken Loans Chairman Dan Gilbert, along with Penn National Gaming Inc., hold the contracts to develop what many fear will only intensify the challenges for Michigan casinos. Gilbert will build in Cleveland and Cincinnati, while Penn gets both Toledo and Columbus.

The prospect of new competition, of course, always prompts those with a stake in the game to protect their market share, which is why Michigan casinos certainly weren’t rooting for the Toledo proposal to pass. But now that it has, Michigan casinos at least have the luxury of time to develop strategies while Gilbert and Penn sort out the details.

If Michigan casinos rise above the Ohio challenge, they will prove that their business model is exceedingly durable. But there’s work to do first.

In 1996, state voters approved a referendum allowing for three casinos in Detroit. That paved the way for the eventual opening of Greektown Casino, MotorCity Casino, and MGM Grand Detroit.

By way of a separate compact between the state of Michigan and various Indian tribes, a total of 19 other casinos operate at various locations throughout the state. Major players in the tribal casino market include the Kewadin Casino chain, which operates five casinos in the eastern Upper Peninsula, the Soaring Eagle Casino in Mount Pleasant, the Little River Casino in Manistee, and the Leelanau Sands Casino in Suttons Bay.

The development of new casinos has often been tinged with controversy, and that was certainly the case with the Gun Lake Casino in Baldwin, near historically conservative Grand Rapids. Fueled by a combination of philosophical objections and concerns for economic competition, local opposition groups — particularly the Grand Rapids Area Chamber of Commerce — fought the Gun Lake development for years before capitulating.

Still, given the need to secure financing and building permits, the $200-million project isn’t expected to open anytime soon. But once the casino opens (likely in late 2011), it will directly compete for gamblers within a five-hour driving radius, considered the sweet spot for drawing weekend visitors and tourists.

That, along with Battle Creek’s new $300-million Firekeepers Casino — which opened last summer with 2,600 slot machines, 120 poker seats, and more than 70 table games — will affect Detroit’s casinos even more.

For 2009, Detroit’s three casinos reported a combined $1.3 billion in revenue, down 1.5 percent from the previous year. In comparison, thanks to a falloff in tourism and air travel, Las Vegas and Atlantic City posted double-digit declines last year.

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