An official publication of Global Gaming Expo

The official publication of the Association of
Gaming Equipment Manufacturers

NOVEMBER 2002

The Mandalay Mission

Mandalay Resort Group stuck to its guns and built its way into being one of the Big Four gaming companies. Now, officials hope that emphasizing marketing will help grow the Las Vegas company

By Andy Holtmann

Glenn Schaeffer, leaning back in his chair, smiles as he points south out the window of his office toward land where Mandalay Resort Group will someday build its "Project Z," a new 3,000-room resort. It would be the fourth property on the company's "Mandalay Mile" on the south end of the Las Vegas Strip, a collection of differently tiered properties that critics once proclaimed would never draw enough customers to succeed.
Today, however, Schaeffer laughs off that earlier criticism. As president and chief operating officer of Mandalay Resort Group, Schaeffer is at the helm of a growing company that has exceeded even some of its own executives' expectations. It was a company that for years struggled to find its identity and was often considered a takeover target, but instead, has managed to quietly evolve into one of the top four gaming companies.
"We have come through the trials by fire over the last seven to eight years," Schaeffer says. "In that time, we have gone through such a reformation that the Mandalay Resort Group of today is least like the company it once was."
Long gone, Schaeffer says, is the notion that the company is focused on operating low-cost gambling houses with elaborately themed gimmicks like circus acts and wizards, perhaps more suitable for children's bedtime stories than the adult playground of Sin City. 
The addition of properties like the Luxor, Mandalay Bay, and MotorCity in Detroit-all built by the company rather than acquired-and a half interest (with MGM Mirage Inc.) in the Monte Carlo hotel casino, put the company on the resort map, and helped give it both an identity and a plan.
"We understand now we can create multiple brands with different appeals to various economic tiers of the market," Schaeffer says. "We can capture more of the overall market that way, which we maybe couldn't do with just the Circus Circus or Excalibur."
Today, the company's portfolio includes five Las Vegas properties, three of which comprise the "Mandalay Mile"-Excalibur, Luxor and Mandalay Bay; two Reno properties, including half ownership (with Eldorado Resorts) in the city's largest casino, Silver Legacy; two casinos in Jean, Nev., a wide spot in the freeway south of Las Vegas; two properties in the Colorado River town of Laughlin, Nev.; a property in Tunica, Miss.; 53 percent ownership of the MotorCity Casino in Detroit and half ownership of the Grand Victoria in Elgin, Ill.
Mandalay executives and gaming analysts alike seem to agree that the best times for the company lie ahead, although a nationwide economic downturn, lack of free-spending visitors to Las Vegas and an ominous tax increase in Illinois combined to force a 3.9-percent dip in Mandalay's second-quarter 2002 earnings. 
"They have more diversification compared to many other Las Vegas-based gaming companies, and that has helped them do well," says Bear Stearns high yield-gaming analyst John Mulkey. "They're generating a tremendous amount of discretionary free cash flow."
And Mandalay has used that money to its own advantage. The company is building a $235 million, 1.8 million-square-foot convention center, a new 1,125-room hotel tower and a 100,000-square-foot retail mall at Mandalay Bay in an effort to lure lucrative convention business to the Mandalay Mile. The company's MotorCity Casino in Detroit is being expanded into a permanent facility with 400 hotel rooms and 100,000-square feet of casino space. The company is also entertaining building an Atlantic City hotel-casino and possibly adding a second Illinois property to its portfolio.
Mandalay has also been busy buying back a significant portion of its stock-roughly 30 percent in the past several months.
All of these moves, observers say, signify the company's dedication to growing shareholder value.
"We think an overall rebound in the Las Vegas market, as well as Mandalay's focus on the convention business and expansions, argues for strong revenue growth," says J. P. Morgan gaming analyst Harry Curtis, who called Mandalay one of his top picks for investment at this year's Global Gaming Expo. "The company's stock, currently trading at $31 per share, is undervalued. We see it getting into the upper-$30 range in the next 12 months."

No Time to Rest
Though Mandalay as a company has found its identity and its properties have generated meaty profits, Schaeffer says the last thing he wants to do is get complacent. 
"We're here today and we're successful, but what we have now is the ability to grow the earnings of this company faster and with the least financial risk," he says.
Schaeffer points to areas of business where the company has not enjoyed the same benefits as some of its competitors-convention and retail business.
That's why Schaeffer says the company decided to invest in expansion projects at Mandalay Bay. When completed in early 2003, the expansion of the property's convention center would give it over 2 million square feet of meeting and exhibit space, making it one of the largest in the nation.
"We have the most rooms on the Las Vegas Strip and we're the least represented in the convention segment, which is the highest-paying customer midweek," Schaeffer says. "Since our company is more sensitive to room rates than any other method, that's the fastest way we can raise our average rates with the least financial risk."
Schaeffer says the convention center also serves an increasing demand for conventions in Las Vegas, noting that only the Las Vegas Convention Center and the Sands Expo Center can service large-scale shows. 
UBS Warburg gaming analyst Robin Farley, in a research note, indicates that there has already been strong interest in and anticipation of Mandalay's convention center.
"The Mandalay convention center may steal share from other cities as well as just other Las Vegas convention venues," she says. "Mandalay management indicated that conventions already booked have mostly been snatched from other cities such as Dallas, Denver and Phoenix."
Farley says capacity bookings are already around 35 percent to 40 percent for the center's first year of operation. 
Schaeffer says the new hotel tower is being built to further capture what is expected to be a heavy mix of convention and tourist traffic once the convention center is completed.
"They already have approximately 1 percent of the total amount of hotel rooms in the nation, so I think that's pretty significant," Mulkey says.
And while having a mix of differently tiered properties might not fit most company's preferred models, Mulkey says that, on the Mandalay Mile, it makes sense.
"With Luxor, Excalibur and Mandalay Bay, they really have three tiers of dormitories, so to say, to attract all kinds of different conventioneers and conference-goers," Mulkey says. "I think it's going to be an interesting experiment there, and it's a smart one."
As for "Project Z," Farley says the company has indicated it might entertain a Miami-themed property costing $600 million to $700 million. The property's potential opening could be timed to take some of the spotlight away from Vegas casino developer Steve Wynn's $2.3 billion Le Reve, scheduled to open in 2005.
But Schaeffer says the company isn't ready to rush into construction.
"We don't have plans in hand yet, but we're ready when the customers are," he says. "We know we want to do it, but we're going to let demand dictate when we decide to build."
Curtis agrees.
"I think that building out the Mandalay Mile any more than they have announced so far would be premature," he says. "Before it can happen, you've got to see returns on investment get up to around 15 percent to 20 percent."

Building a National Presence
In Detroit, Mandalay is looking to further capitalize on what Schaeffer describes "one of our strongest growth engines" by creating a permanent facility for its MotorCity Casino, which Mandalay co-owns with Detroit-based Atwater Casino Group.
In August, Mandalay reached an agreement with the City of Detroit to build out the property's temporary facility into a 100,000-square-foot casino with 400 hotel rooms, a 1,200-seat theater, convention space and additional restaurants and retail outlets. The expansion is to be competed by Dec. 31, 2005.
Mandalay, along with MGM Mirage's MGM Grand Detroit and the Sault Ste. Marie Tribe of Chippewa Indians' Greektown Casino, have for nearly two years been trying to hammer out agreements with the city for permanent casinos. But political maneuvering, a failed city plan to purchase riverfront property for the casinos and an intervening lawsuit by parties challenging the city's casino selection process have slowed progress.
One suit by the Lac Vieux Desert Band of Upper Lake Superior Chippewa Indians, if won, could force Detroit to rebid its three casino licenses. But Schaeffer says he doesn't feel the MotorCity Casino would ever be forced to close.
"We've done a good job with the city, we have a contract with it and the State of Michigan and we've lived up to and exceeded expectations there, so we don't feel threatened," he says. "We're ready to grow there."
Each quarter since MotorCity has been open, it has reported increases in cash flow. In the third quarter, when other properties were still feeling the effects of 9-11, MotorCity posted a 39.3 percent increase to $33.7 million.
The company's flagship, Mandalay Bay, by comparison, posted a 16.5 percent cash flow increase to $38.8 million.
At the company's Grand Victoria riverboat in Elgin, Ill., cash flow fell from $33.7 million to $28.6 million because a new tax imposed by state legislators took 50 percent of casino revenues on properties generating over $200 million per year. But Mandalay officials have liked the cash flow the company has been able to generate from the Illinois boat, and have pursued a second Illinois property, vying for the state's final gaming license, once expected to be used for a casino in the Chicago suburb of Rosemont.
Mandalay also vied for one of the three casino licenses in the Chinese city of Macau and has shown interest in Atlantic City, though officials want to gauge the success of the $1.1 billion Boyd Gaming/MGM Mirage Borgata property when it opens next year before committing.
Schaeffer says the company's growth strategy is not based on acquiring existing properties. "Our acquisition appetite has been for our own stock, not anyone else's."
But Mulkey says Mandalay has both the balance sheet and capacity to acquire should it choose to do so.
"I think to the extent they wanted to take it on, they could diversify their cash flows on a geographic basis through an acquisition," he says. "They have the wherewithal to grow and a shareholder base that expects them to grow. That's an enviable position to be in."

Road to Mandalay
"Getting here wasn't easy," Schaeffer says, noting the company's long and sometimes frustrating ascent to the top.
Mandalay's roots start with the opening of the Circus Circus hotel-casino on the Las Vegas Strip in 1974. The company later added the Circus Circus Reno, and officials took the company public in 1983.
Over the next 10 years, Schaeffer says Circus Circus Enterprises was the fastest growing company in the gaming industry. In the late 1980s, the company added another 1,200 rooms to Circus Circus Las Vegas, bringing the total number of rooms there to 2,800-one of the largest resorts on the Strip at the time. In 1990, the company built the 4,000-room Excalibur Hotel & Casino-at the time, the world's largest hotel. 
In 1993, a management shake-up affected the company. Schaeffer and others left after differences with then-Chairman Bill Bennett. Bennett later left the company after a failed bid to personally buy the Hacienda hotel-casino on the south Strip (and since imploded), which Circus Circus was also trying to purchase. Bennett later bought the Sahara Hotel & Casino at the other end of the Strip. 
The remaining management of the company pressed on opening the Luxor later that year. When Circus Circus bought the Gold Strike Resorts in Jean for $590 million in March 1995, it afforded an opportunity for Schaeffer and other executives who had previously left the company to come back.
They included Michael Ensign, formerly COO of the company; Tony Alamo, who was a former officer of the company; and Bill Richardson, who, while not a former employee, brought his development expertise to the company. "There was a lot of talent that came with that acquisition," Schaeffer says. "That helped shape the company we have today."
Schaeffer says the new team of executives began developing strategies to grow the company, but they knew it wouldn't be easy. 
"This company we had to essentially rebuild," Schaeffer says. "Luxor we had to rebuild from the inside. We had to plan and build Mandalay Bay. We had to open the Detroit casino. We expanded both Circus Circus properties. We refurbished every room we had in Las Vegas. We did a lot in a very compressed time period.
"But of course, the stock markets are notoriously impatient. They wanted results on a quarter-to-quarter basis. It just doesn't work that way."
So demanding was Wall Street at times that Schaeffer and other Mandalay executives became frustrated. But by 2000, Schaeffer says, Wall Street finally began to take notice of the progress the company was making.
"That's when you could see rising room rates across the board in this company, rising same-store sales. We had that momentum without having to reinvest a considerable amount of capital. Our company's business model, which is to attract customers who fill out the Baby Boom generation that are willing to spend more every year, really began to show its worth."
With Mandalay Bay, the company also found a new model, marketing "hip and cool" to younger, 20-something crowds. 
"Clearly, with our restaurants, night clubs and the House of Blues, we've found that niche" at Mandalay Bay, Schaeffer says.
The company has also developed aggressive marketing campaigns and programs designed to drive customer loyalty-the most recent was this year's rollout of Mandalay's "One Card" player incentive program that connects all of its Las Vegas properties.
The change in company focus, Schaeffer says, has been dramatic.
"Whereas you might once have thought of Circus Circus as being in the slot-machine business, today, we recognize the importance of building customer value and loyalty. We're more of a marketing company today."


SIDEBAR

Going the Mandalay Mile

By Andy Holtmann

At the top of the gaming business, the business of the day isn't just slot machines and hotel rooms. Mike Sloan, senior vice president of Mandalay Resort Group, explains his role as a governmental and community liaison and Mandalay's quest to be a good corporate citizen.

Mandalay Resort Group has grown into one of the gaming industry's most powerful companies. How has it handled its growing responsibilities as a corporate citizen?
We're actively involved in each community we do business in, whether it be in Las Vegas, Reno, Elgin, Detroit or Mississippi. To the extent we are able to, we participate in the governmental and political processes in those communities. In Nevada, I'm currently representing the gaming industry on the Governor's Task Force on Tax Policy. Ten years ago, I participated in the Urban Institute PriceWaterHouse study of the state tax system. Although we're not always in the spotlight, we make a point of getting involved.
With regard to the Governor's Task Force, what are some of the things being discussed that are important to Mandalay and the gaming industry as a whole?
As one of the larger industries in the state, we're very concerned about the quality of education. After all, we have employees who have children here, and so do the executives. We care about the same things that everyone else does. We want to make sure we have good schools, we have good universities, good social programs. Since this industry has been around longer than any other with the exception of mining, we've taken an active interest in trying to address those problems.
There's been talk of potential tax increases in Nevada for some time, mostly from the mouth of state Sen. Joe Neal. Do you see one coming, and if so, what would be a workable tax?
Well, it's a difficult time to raise taxes on any industry, and specifically, there is no worse time to raise taxes on the gaming industry. It's a time right now when growth revenues are down. Everyone knows our expenses are up. We have the union contracts which were just settled. We have the high cost of power. It's tough to raise taxes.
Nevertheless, the Nevada Resort Association has taken the position that we will support tax increases on gaming revenue and nongaming revenue to the extent that other businesses in the state participate. 
I think what's been discussed so far is a 0.25-percent tax increase of gross gaming revenue, and a 0.25-percent tax on all nongaming revenues businesses earn, whether it's a bank, a retail store, or the casinos.
In comparison to most states, Nevada's shortfall is not a big number. I think one of the things we've figured out on the task force is that all Nevada businesses collectively do gross revenue of somewhere between $125 billion and $150 billion per year, and the gaming industry accounts for about $23 billion of that, including our nongaming income. There's five times more business activity in the state that does not include the gaming industry, and we carry 60 percent of the tax load.
There are always some challenges to overcome when entering new markets on a social, political and legal basis. What are some of the more significant challenges Mandalay has faced?
First, you need to try and become assimilated into the community to understand the expectations and values of that community. That requires different degrees of sensitivity in different areas. Things are different in Vegas or Reno compared to places like Elgin, Ill., or Mississippi. I think we've done pretty well. The issue of diversity, employment and procurement are things we have tried to focus on. We don't do a lot of that in terms of public discussion, but it's been something we pursue aggressively. 
Some companies, when they enter a market, use vigorous ad campaigns-billboards, TV-to outline the benefits that they feel they can bring to the community. Does Mandalay engage in those tactics?
No. I think in some jurisdictions certain expectations have been pretty well established, and in some instances it's impossible to live up to those expectations. If you remember, when casinos went to Atlantic City, they were expected to cure all the ills of that city. 
We try to meet with people in the community and give them some kind of nonadvertising presentation as to what we can realistically offer. Our projects tend to be larger in scope. Detroit is a major undertaking. Our boat in Elgin is also significant, but we haven't been involved in campaigns to legalize gambling or to try to convince people to authorize it in certain places, so in that instance we may be a little different from other companies in those markets.
Can you explain Mandalay's human-relations philosophy?
One of the remarkable things about this company when you look at it is that the people at the top, from [Mandalay Chairman Michael] Ensign to [Senior Vice President Tony] Alamo, they've all worked their way through the ranks in the gaming industry. This company promotes from within; it has all along. We have people who have gone from the bottom to the top.
We have a woman [Rhonda Cohen] who is the general manager of our Detroit property, who started off years ago in the industry as a cocktail waitress, then a dealer, and she worked her way up from there. 
The general manager of Mandalay Bay is a woman [Terri Porcaro] with a similar experience. For years, we had the highest day-to-day African-American employee in the gaming industry in Don Gibbons, who has served as general manager of a number of our properties, including Excalibur. We have Hispanics at high levels, women at high levels. That's not because they were minorities, it's because they excelled and had the opportunity to excel in our company.
We're not big on patting ourselves on the back and taking out expensive campaigns to show what we're doing, but we demonstrate to our employees and to others who are interested that we don't just talk about it, we do it.
Explain for me your company's relationships with the unions.
I'd say that over the years, we have had a very good relationship with the Culinary Union. We have very high regard for its leadership, John Wilhelm and before that Ed Hanley. I have served as a trustee on the health and welfare fund for almost a decade, and nearly as long on the pension fund. We work closely on a variety of issues.
Explain for me how the company dealt with the 9/11 terrorist attacks and the resulting layoffs.
Obviously, it's a difficult decision any time you have to make reductions in staff. I think the judgement made then by us, and thousands of other American companies, was that in order to preserve the core business, in order to preserve the majority of jobs, then you had to make some changes because you simply didn't have customers. You can't sustain the same range of expense.
We didn't just reduce employees, we reduced compensation for all our executives, which I think was unlike any other gaming company. We reduced expenditures that weren't necessary in a whole range of departments. We did all that to preserve the business and be in a position to reengage people who were let go or restore hours to employees that had their hours cut. Today, we're very close to being back to where we were.
No one knew on Sept. 12 what else was going to happen. In the news, there were warnings every day that something else was going to occur. To this day, our business is not quite where it used to be. We did the best we could, based on what we knew. Could we have done it differently, or better in hindsight? Probably. But that's true for everyone. 

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