Conventional wisdom in the gaming business says that when the economy is down, sales head south. And yet, Detroit’s three casinos experienced stronger-than-expected revenue growth in 2010, compared to a year earlier.
“It was a pleasant surprise,” says Grant Govertsen, an analyst with Union Gaming Group in Las Vegas. “The combined Detroit gaming revenues were up roughly 3 percent, and in the face of the economic recession across the U.S. — and more specifically in Detroit, which, not unlike Las Vegas, has higher-than-average unemployment — to see revenue up is surprising, especially when you compare it to Las Vegas.”
Although other gaming operations across Michigan also achieved revenue growth last year, Govertsen warns that casinos can’t sit idly by and expect gamblers to continue to come flocking in. With increasing competition for entertainment dollars, he says the casinos must earn their business every day via creative marketing programs, advertising, and offering great entertainment and dining experiences.
And while last year’s revenue performance was unexpectedly strong, at least one top Detroit casino executive is surprisingly candid in asserting that the numbers make things look better than they really are. Gregg Solomon, CEO of MotorCity Casino, says all three Detroit casinos essentially primed their performance by buying additional business.
“A gaming operation reinvests in its customers on numerous levels,” Solomon says. “One of them is well-known, and that’s complimentaries. These manifest themselves in many different ways, such as hotel comps, which was something fairly new to our market because we only developed the hotel products in 2007. But comp shows, comp outings, comp golf, comp trips to Las Vegas — in some cases, just flat-out gift redemption — these are ways we ‘buy’ business.
Another method of buying business, widely utilized in Detroit and initiated by MotorCity, is Reward Play. “It’s a way for us to electronically implement what was done in a manual process by way of drawings,” Solomon explains. “If we sent you a coupon and said, ‘Come back to MotorCity and you will be entered into a drawing for X number of prizes,’ we developed that technology so that rather than [having you put] your ticket in a drum and we spin it, we allow you to take your card and redeem an offer at the slot machine.”
With all three Detroit casinos using Reward Play in one form or another, Solomon believes the local industry’s apparent growth is misleading, because so much of the additional business was essentially purchased.
“We had three casinos in the same area that were giving these Reward Play offers, so that’s why Detroit developed in a way that was different than (casinos) in these other markets,” Solomon says. “The growth that outside observers are seeing in the Detroit market is, to an extent, artificially created.”
Solomon compares the situation to reports released before the 2008 economic recession that showed an uptick in auto sales, but failed to mention that most of the increase in sales were made because of generous incentives that were given to customers.
“If you consider that all three casinos are doing some variation on this to the tune of $2 million a year or more per property, then it doesn’t take much to say that this modest amount of year-over-year growth equates to what you could probably add up on your fingers as what we’re putting out there in Reward Play,” Solomon says.
For Greektown Casino, last year saw the company’s emergence from Chapter 11 bankruptcy, a change of management companies and, finally, the takeover of the gaming operation by a committee of creditors — currently headed by CFO Cliff Vallier, who is doubling as acting CEO.
At the end of 2009, Greektown parted ways with The Fine Group, a Las Vegas-based gaming management company. The Fine Group had sought to kick-start the casino’s fortunes with a variety of very aggressive promotions, as well as by positioning it as the lowest-cost casino in town.
As Greektown sought to fight its way out of bankruptcy, it experienced a tough financial first half of 2010, followed by an encouraging second half.
“We’re a completely different company (since coming out from Chapter 11 last June),” Vallier says. “We have a much different capital structure, and we’re an extremely strong company in the gaming market across the United States and in the Detroit area.”
Greektown Casino’s improved capital structure, Vallier says, should allow it to make some long-awaited capital improvements, although he declined to be specific. But Vallier believes Greektown’s long-term success depends on the larger vibrancy of the Greektown vicinity, and he plans to work with other Greektown retailers and restaurateurs to boost the fortunes of the district — which was hurt economically in recent years by various factors, including the short-term closure of a prime highway exit ramp often used by patrons.
“We’re working hard to make this a premier entertainment district,” Vallier says. “We have had informal discussions with various people, but most definitely the process will not be solely made by us. It will be a community effort.”
Govertsen thinks Detroit casinos can succeed by recognizing the market segments they respectively own, and catering to them.
“You’ve got MGM at the high end, and there’s always a need for different tiers of product in a market,” Govertsen says. “If one casino says, ‘We’re going to go after the low end,’ that’s fine, and you can still be successful.”
As Detroit and Michigan’s economies improve, the resulting increase in discretionary income will help drive growth in the gaming market, says Van Conway, CEO of Conway MacKenzie, a restructuring and financial advisory firm in Birmingham. The company serves as financial adviser to Greektown and helped guide it through bankruptcy.
“The American car companies are competing straight up with their foreign rivals, and as that industry recovers, you’re going to see significant new investment in southeastern Michigan,” Conway says. “As you build, often you look to locate new investment in a 100-mile radius so it’s easier to monitor and oversee. That will really drive growth here.”
Nationally, casino revenues were relatively stagnant in 2010, gaining less than one-half of 1 percent compared with 2009, says Frank Farenkopf, president of the American Gaming Association. In an annual report issued by the national association, Farenkopf says the industry continues to recover from the financial collapse of 2008.
“For a long time, people wrote that our industry was sort of resistant to economic downturns,” Farenkopf says. “The analogy was always made to the motion picture industry. During the Great Depression, the motion picture industry had its heyday, because no matter how poor people were, they always saved up enough money on the weekend to go see a movie and get away from their problems.”
So why was this downturn different?
“I don’t think we’ve had an economic downturn — since maybe the Great Depression — to the extent that we had at the end of 2008, and that still continues,” Farenkopf says. “With a mild recession, I think the old analogy to the movie industry was a good one. But the depth of this (downturn) had a major impact.”
Somewhat surprisingly, markets like Detroit did not sustain the worst damage.
“The places that were most drastically hurt really were what we would call the fly-in market, the destination-type resorts,” Farenkopf says. “Many people were no longer willing to pay the airfare and hotel fare to go out and spend three or four days in Las Vegas or the Gulf Coast in Mississippi. The regional markets in the Midwest were mostly flat, and didn’t suffer the real downturns that some others did.”
Farenkopf says no market has suffered more in recent years than Atlantic City, but the reason for that is easy to explain: New casinos in nearby Pennsylvania have provided stiff competition. Last year, after adding table games, casinos in Pennsylvania saw their combined revenue climb 21.6 percent, while New Jersey casinos were down 13.3 percent.
Thus far, Detroit’s casinos have not faced the sort of emerging competitive threat seen in Atlantic City and New Jersey, although the expected 2012-13 opening of casinos in Toledo, Cleveland, Columbus, and Cincinnati will impact market share (the casinos in Cleveland and Cincinnati are owned by Quicken Loans Chairman Dan Gilbert).
“The (Detroit casinos) do their best to fight any sort of expanded gaming proposal, whether it’s the slots at racetracks or the issuance of new casino licenses,” analyst Govertsen says. “That would certainly be a major negative for them, so that’s the thing they’re likely to focus on other than just their operations in general.”
Govertsen adds the Michigan Legislature likely helped the Detroit casinos significantly by exempting them from the state’s ban on smoking in public places, which took effect last May. That, along with post-9/11 security considerations, provided a needed competitive advantage over Windsor.
“You can smoke in a Detroit casino, but you can’t in a Canadian casino,” Govertsen says. “And it’s harder now to cross the river because they’re requiring a passport to travel from the U.S. to Canada.”
Local casinos still have work to do on the marketing front, says Robert Russell, a gaming analyst at Regulatory Management Counselors in East Lansing. “Although the Detroit casino industry is in its 12th year of operation, the area’s permanent casinos, complete with hotels, convention space, and added restaurants, are still relatively new,” Russell says.
“Many metro Detroit and outstate residents have yet to experience the entertainment opportunities at the three Detroit casinos; thus, this continues to be a great asset for the operators to collectively benefit from. Detroit’s gaming facilities rival those from Atlantic City to Las Vegas, and there continues to be many Michigan — and Midwest — residents who have yet to be wowed by what is offered in downtown Detroit,” he says.
And even though Solomon is not all that impressed by the market’s numbers in 2010, he says less tangible factors are a source of optimism about where the industry is going. While it wasn’t long ago that the general mood of casino patrons was down, he says the outlook has changed dramatically in recent months.
“Just walking around the floor, feeling the way things feel, it seems that the doom and gloom is old news,” Solomon says. “People are done with that. And we’ve seen some spectacular results. On New Year’s Eve, we set an all-time record slot win. You can attribute it to a lot of things, but I think there is an improvement in the attitude of the general public.”
In addition, more industries are expected to invest in business and convention travel in the coming months, Russell says. That means Michigan casinos stand to benefit, given their facilities offer state-of-the-art environments for conventions, meetings, and business entertaining.
“As businesses begin to invest in their employee base, and as the Detroit automobile industry begins to recover, it should prove to create some positive developments for tourism,” Russell says.