Game-Changer

After a down year in revenue, can Detroit’s three casinos reverse course by tapping into a new hockey arena and two emerging entertainment districts?
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Illustration by Gary Taxali

When the MGM Grand, MotorCity, and Greektown casinos set up shop in Detroit more than a decade ago, they were clearly aware that they were entering a market with no history in the gaming industry, in a region with multiple challenges — ranging from nearby competition to an unpredictable state legislative body to a host city that was, itself, tempting fiscal fate.

Now, after another year of declining revenues, and facing a local market in 2014 that has the potential for change and instability, the three casinos are re-thinking their business strategy to remain strong in the years ahead.The numbers are hardly cataclysmic, but after a slight revenue decrease of half a percent from 2011 to 2012, the three Detroit casinos experienced an income slip of 12.3 percent in 2013, with overall total adjusted revenue falling from $1.4 billion to $1.2 billion, according to the Michigan Gaming Commission.

MGM Grand Detroit declined 13 percent, from $604.9 million to $521.8 million. MotorCity fell a comparatively modest 9.1 percent, from $459.7 million to $417.3 million, while Greektown Casino, which was sold following a Chapter 11 bankruptcy to Dan Gilbert’s Rock Gaming organization, dropped 14.2 percent from $352.1 million to $302.9 million.

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To be sure, the 2013 numbers are more consistent with the market trend over the past decade, whereas 2012 represented only a slight improvement that the Detroit casinos surely hoped was not a short-term result. Even so, they and others who follow the industry recognize that a limited market of gaming patrons may already be at a saturation level, while competition in the region is only increasing.

 

“All three (casinos) have to bring in some new patrons,” says Jake Miklojcik, a gaming expert and president of Michigan Consultants in Lansing. “They have to do some different marketing, but they all fight for the same patron.”

And who is that same patron they’re all fighting for?

Miklojcik sees the viable market for the Detroit casinos as middle-aged residents of the seven-county area who like to play slots and might be interested in specials like triple points on a Tuesday afternoon.

“They all love the big players, of course, and that’s where their profits are because your costs for a $25 slot machine aren’t much different from a 25-cent machine or a blackjack table where the minimums are $100 or $10,” Miklojcik says. “So you love the big player, but those are tough to get, and a lot of the efforts are for the Tuesday- or Wednesday-afternoon player. And there’s only so much you can do with that.”

No Detroit casino has been more challenged in recent years than Greektown, and Gilbert’s decision to purchase the property last year was greeted with high hopes for its potential to bring stability and a serious financial investment in upgrading and solidifying the operation and its financial performance.

For Gilbert’s Rock organization, much of the impetus for turning around Greektown’s fortunes appears to rest on the belief that the successful culture at Rock Financial/Quicken Loans can bring the same positive results to the Greektown Casino.

“It’s been tough for this property because it’s gone through a period of really absentee owners for a long time, and they didn’t have an ownership that was prepared to make the investments,” says Matt Cullen, president of Rock Ventures. “So I think that along with the physical changes we’re talking about, it allows us to compete for a fair share of the pie.”

 

That effort is combined with a reorientation of the facility to integrate it better with the broader Greektown area.

“I don’t want to go too far into the physical planning, but we’re going to be all about entertainment, and you’ll see an investment in those assets that makes it sort of a combination recreational/gaming facility,” Cullen says. “I think our location gives us a huge advantage in that regard. They can interact with the facility in a variety of ways and be down in that district, so you’ll see a lot more collaboration with the retail and the restaurants in the Greektown area.”

Miklojcik says that may or may not be enough to genuinely boost Greektown’s market share, but he doesn’t think Greektown needs that to be successful.

“I don’t know about turnaround,” Miklojcik says. “They want to get more stability. I don’t know if Greektown will ever get to 30 percent (of market share). I don’t think it needs to. They have very high interest rates there, although not as much debt as the other places. But just stabilize it.”

Rock Gaming is looking at the ill-fated Wayne County Jail property at I-375 and Madison Avenue as a possible mixed-use development that would serve to complement the casino, but Cullen says a lot of things have to happen before a deal comes together, including the consolidation of the county’s jail operations at a different location on Detroit’s east side, along Mound Road.

 

“And then we need to demonstrate we could put (the Madison site) to productive use,” Cullen says. “So with that predicate, let me say that if it were able to come together, some kind of expansion of the entertainment district is what we would want to do. It would be mixed-use because there are great opportunities for residential, but when you think of an entertainment district that expands from the new hockey arena to Comerica Park and then into Greektown for the casino, it would be a tremendous asset to our region.”

In recent interviews, Cullen has likened the potential new entertainment district to that of L.A. Live in Los Angeles, a $2.5-billion, 27-acre area adjacent to the Staples Center that includes performance venues, apartments, condominiums, ballrooms, restaurants, movie theaters, an ESPN Zone and broadcasting studio, theGrammy Museum, and a hotel.

For MotorCity Casino, which is second in the market and experienced the smallest drop in revenue in 2013, the year was not without some serious changes.

“We basically started from scratch and drew out a completely new gaming layout, including moving some of the parts around and also creating some new aisle spaces,” says Gregg Solomon, president and CEO of MotorCity Casino. The gaming venue replaced more than 25 percent of its entire inventory of slot machines, a number Solomon called “astronomical” by industry standards.

“There was a time when the industry used to do somewhere between 15 percent and 20 percent a year, and that included conversions,” Solomon says. “No one’s been doing that for the last five years, certainly not since 2008, when everything kind of started declining. So it was a major commitment, but we think we need to be the best gaming product in the market and we’re convinced we are.”

 

That is especially true, Solomon says, because hotel rooms can only do so much to drive revenue, especially in the Detroit market.

“Unlike larger resorts, where you’ve got thousands of rooms driving a lot of revenue to the bottom line, the Detroit casinos only have 400 rooms each, so the gaming operation is still a very significant contributor to our bottom line,” he says. MotorCity also revamped its Players Club, including its methods of point redemption and complimentary awards.

While 2012 represented a strong year for MGM Grand Detroit, with total adjusted revenue topping $600 million, 2013 was at $521.8 million. “We had an incredible year in 2012,” says Steve Zanella, president and COO of MGM Grand Detroit. “So to be down from that a bit, I look at market share and our share is still running, on average, about where it’s been. And one thing to keep in mind is when you take a look at promotional spending, and what types of promotions are going out, we have a very strategic approach to how we’re rolling different promotions out. We don’t want to get into a pricing war.”

MGM instituted its share of changes to the gaming floor, including three rebranded restaurants, while 500 of its 4,000 slots were replaced with new games. What’s more, 30 percent of all slots on the floor changed through conversions, new machines, or swap-outs. As a result, Zanella says MGM Grand Detroit has no intention of embracing a major change in direction due to one year’s performance.

“We want to keep the experience such that our brand remains the top brand,” he says. “I can’t change how you get treated when you come in, because that would go against our branding and our positioning. So we went through and changed our restaurant offerings to give people a little more value for the dollar, and we make sure the properties are kept up. We’re the only four-star place in the state, and between the three competitive casinos we compete on a nongaming basis with different groups, as well.”

 

Detroit casinos continue to watch the competition offered by tribal casinos across the state, by Ohio’s four operating casinos, and by the possible emergence of new “convenience gaming” options like online gaming, race track slots, or pull-tab gaming. A group of investors in Lansing also hopes to receive federal approval for a downtown casino.

But not every external factor has necessarily been to their detriment. According to Miklojcik, the Detroit casinos have benefited from the immigration restrictions imposed after the 9/11 attacks, because U.S. residents are less likely to go through the hassle of crossing the border just to visit a casino. Miklojcik says many would-be Windsor casino-goers are finding it’s easier to take their gaming business to the Detroit casinos. The Windsor Star reported last year that Caesars Windsor had experienced declining revenue in recent years.

Those factors were somewhat offset, though, by the emergence of the Hollywood Casino in Toledo, which is now an option for area residents whose closest alternative was once Detroit — not to mention for those Detroiters who are open to a quick getaway. Through September 2013, Hollywood Casino reported year-to-date revenue of $140 million, which was slightly below its 2012 pace.

“Toledo is one variable in a wave of variables,” Rock Venture’s Cullen says. “Toledo was open for awhile and it didn’t have much impact on Detroit, and Detroit withstood what had been a little bit of a downward trend in regional casinos.”

The Detroit casinos are not the only ones coming off a down year. The gaming industry nationwide is considering the question of whether it has become oversaturated. Patrick Roberts, writing in Global Gaming Business Magazine, said in December: “Revenues at existing casinos have largely stalled or declined all across the U.S. as more competition comes on. Booms over the last few years are largely over.

“Casinos in Atlantic City, Connecticut, and Delaware have been devastated by surrounding competition. Revenue at tribal casinos that were once money machines for tribes have leveled off or been in decline. And the younger generations — X, Y, and Z — have not taken to gambling as their elders did. Whether it’s the lack of skill games that are so popular among youth or a focus on the nightclubs, there has been no crossover to the casino floor.”

 

Recognition of the industry trend is one reason casinos are upgrading and looking to reach new markets. “If you take a look at other regions, most (of them) are down, as well,” MGM’s Zanella says. “And it’s because we’re not a vacation market, so we compete for that discretionary spend, and there’s a lot of competition for it right now. People are still not spending like they were. This Great Recession has really impacted how everybody thinks about spending.”

Still, some are optimistic that a new hockey arena for the Detroit Red Wings, along with a neighboring mixed-use district near the northwest corner of I-75 and Woodward Avenue, will help draw more visitors downtown. The overall project is expected to cost $650 million, and will begin to open as soon as 2017.

“Rising water floats all boats,” Cullen says. “Detroit is such a different place than it was in the past year, and I think in the next few years downtown is going to be booming — and with that comes people who live down here and people who come here to recreate.”

Detroit needs the uptick as much as the casinos, as emergency manager Kevyn Orr has made it clear that casino revenue is the city’s most stable source of operating revenue. To that end, Solomon says he hopes the city can help by changing the way it does business with business. “We’d be happy to see the regulatory and licensing process, things that affect all businesses in Detroit, become more friendly,” Solomon says.

Cullen cited an influx of as many as 20,000 new downtown employees since 2010, many of them working for Gilbert and his various endeavors, as an example of how a changing Detroit can alter the environment for the casinos. “There’s a large percentage of people in our region who have not had coming to downtown Detroit as something that was going to be part of their entertainment unless there was a ballgame or something,” Cullen says. “I think that (is changing) now, especially with the tremendous growth of residential within the city — and they’re primarily young people who like to go out and experience things.”

As for possible changes in the casino market itself, Miklojcik cites talk that both MGM Grand Detroit and MotorCity are willing to listen to offers from buyers. “We at MotorCity are always interested in anything that might be out there that looks like a good deal,” Solomon says. “We stay pretty informed as to what’s out there and what might be available. We’ve certainly looked at several deals and, if the right deal comes along, we would definitely be a player.”

As for MGM, Zanella says he has heard no such talk, although he emphasized it would be driven from the casino’s global headquarters in Las Vegas, and not from Detroit. “There’s been no indication from corporate,” Zanella says. “We’re a publicly traded company, so our officers, if there’s an offer on the table, would have a fiduciary responsibility to look at it. But as far as actively pursuing (a potential deal), I am not aware of anything like that.” db

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