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Struggling to survive
The Southern gaming markets’ 9/11 reprieve ends as marketing wars heat up again

By Janet Plume

At this time last year, the South’s two major gaming jurisdictions—Tunica and Biloxi, Miss.—were gliding along an unbroken revenue growth stream. But a slowing economy had already begun accelerating the intense casino marketing wars within their borders.
Then the terrorist attacks of Sept. 11 shattered the travel industry and split the gaming world into two groups: destination resorts and riverboats.

Grounding the airline travel industry may have gouged Las Vegas’ gaming business, but it became a boon to drive-in riverboat markets from Iowa to Mississippi. While hotel occupancies at traditional land-based casino markets like Las Vegas and Atlantic City fell by 40 percent and 25 percent, respectively, in the first week after Sept. 11, casino operators with portfolios weighted in the riverboat markets bounced back quickly as players turned away from Las Vegas and stayed close to home, packing riverboat casinos.

As the Southern drive-in markets thrived, the fierce competition within these maturing markets took a breather, allowing many operators to stabilize declining profit margins for the remainder of the year.

Gaming analyst Daniel Davila at Hibernia Southcoast Capital attributes the quick rebound of riverboat markets to a desire by players to escape the horrors of Sept. 11.

“People were afraid to fly and didn’t go to Vegas,” Davila says. “The riverboats offered the same escape without flying, but the impact of 9/11 is about more than just air traffic. Terrorism is a direct enemy of tourism; the travel industry was changed forever.”

On the Mississippi Gulf Coast, Grand Casino Biloxi’s snappy return to business as usual was bolstered by the fact that so many other events, including college football and baseball, were cancelled following the attacks.

“People stayed home glued to their TV sets watching the news for several days,” says Duncan McKenzie, general manager at the Park Place Entertainment resort. “In the following weeks, things picked up, partly because of other entertainment being cancelled.”

Last fall’s terrorist attacks occurred at a time when many casino riverboats traditionally experience a business slowdown on the heels of the peak summer season. For the better part of the year leading up to Sept. 11, marketing wars ruled. Players were flooded with media advertising, direct mail promotions, large-scale giveaways and other ploys ranging from dirt-cheap hotel rooms and free meals to the ultimate giveaway: cash.

Corporate quarterly reports and industry analysts repeatedly bemoaned promotional and marketing expenses, which they said were hurting profits despite steadily climbing revenues.

The scenario was all too familiar to industry executives who had witnessed the casino marketing wars that had knocked the wind out of Atlantic City casinos in 1996. That year, Atlantic City’s dozen casinos collectively doled out some $615 million in player incentives—26 percent more than the previous year.

In the middle of one ‘Bus Wars’ promotion, day-trip players from the Eastern Seaboard were climbing aboard charter bus tours to accept cash offers that totaled more than $30 a head.

Meanwhile, while gross revenues inched up only slightly—by 1.8 percent, to $4.2 billion—operating profits dipped from $1 billion in 1995 to $810 million in 1996, a downturn of nearly 20 percent.

The end result was a net loss of $257 million, a steep decline from the $147 million the Atlantic City gaming market recorded in 1995.

Beau Rivage and Grand Casinos
As Coca-Cola is to Pepsi and Reebok is to Nike, Beau Rivage is to Grand Casinos. MGM Mirage’s Beau Rivage sparked the Gulf Coast casino marketing wars when it opened in 1999 with television ads narrated by Elizabeth Taylor accentuating the newest casino resort’s upscale amenities. The Gulf Coast’s 11 other casinos had been feverishly revamping their properties to compete, and the marketing wars were off and running.

The Grand Casinos at Biloxi and Gulfport mounted an equally high-profile ad campaign touting their new hotels and upscale restaurants. Casino advertising filled the airwaves and billboards, and competing properties launched regular giveaways.

Beau Rivage was able to maintain revenue growth in the Sept. 11 aftermath, but at a price, spokeswoman Mary Cracchiola says. The casino resort’s final- quarter net revenues outpaced by nearly 4 percent the previous year’s posting of nearly $65 million, but EBITDA during that period fell nearly 50 percent to $7.8 million.

Grand Casinos Biloxi-Gulfport posted similar results. Fourth-quarter revenues for the two casinos were flat at $100 million, but their combined EBITDA declined 10 percent to $20 million.

“Grand Casino Biloxi generated $10 million in EBITDA in the final quarter of 2001 versus $13 million for fourth-quarter 2000,” McKenzie says. “Our higher gaming volume was offset by enhanced marketing programs we used to attract more customers during the final quarter.”

This year, as passenger volume through Las Vegas’ McCarran International Airport slowly began to return, the riverboat markets have once again ramped up marketing campaigns.

“The post-Sept. 11 riverboat markets were so robust that they drove the multiples of some companies to all-time highs,” says Eric Hausler, gaming analyst at Bear Stearns. “The fear of flying kept people closer to home.”
The fact that today’s riverboat casino product is much more upscale than it was in the past also encourages the competitive atmosphere.

“Riverboat markets have been steadily upgrading their properties and amenities in recent years,” says Isle of Capri Casinos Operations Vice President Tim Hinkley. “The properties are bigger, better managed and more aggressive in marketing.

“Now that people have started getting back on planes and returning to Las Vegas, there’s a question whether or not the riverboats will be able to sustain these revenue levels,” he says. “Already, the record gross revenues are coming at unprecedented levels of spending for marketing, advertising and promotions.”
Last year, riverboat drive-in markets nationwide—aided by lower gasoline and energy prices—posted earnings growth of about 30 percent, outperforming the Standard & Poor’s 500 Index, which had a 21 percent earnings loss, according to Merrill Lynch gaming analyst David Anders.

“The riverboat markets’ strong growth stems from increased capital improvements to elevate services and amenities,” he says. “The solid growth in revenues, however, is offset by these competitive conditions, which remain challenging.”

Last year, the dozen casinos along the Mississippi Gulf Coast collectively posted a profit margin of 0.5 percent.
Tunica’s nine casinos spent 102 percent of combined revenues on payroll, operating expenses and advertising, resulting in a negative margin of 0.2 percent, despite a 2 percent rise in revenues to more than $1 billion.

The importance of branding
The nearly suicidal intensity of the marketing wars in Atlantic City taught its operators quick lessons in marketing discipline, and today they continue to show restraint in these challenging times, keeping promotional expenses in the low 20 percent of total revenues, according to Hausler.

As the competition for casino market share has heightened, brand equity has taken on new weight for many Southern operators. Both Grand Casinos and Isle of Capri have followed Harrah’s lead by introducing a single player advantage card good at each of the respective company’s properties. Even before the marketing wars began with the opening of Beau Rivage in 1999, Isle of Capri had invested heavily in advertising, making its Caribbean theme one of the most recognized brands in the South.

“As our markets have matured and competition has increased, we have dedicated marketing efforts to identify our valuable customers,” Hinkley says. “We have built relationships with them by focusing on database-driven loyalty programs through our Island Gold player club.”

Isle of Capri President Jack Gallaway has insisted that Isle’s marketing focus hinge on loyalty programs because he firmly believes that 80 percent of his company’s revenues are derived from 20 percent of its players.

“That’s why we devote the lion’s share of our marketing budget to building loyalty and increasing trip frequency of better players,” he says.

A few years ago, Isle joined its two casino neighbors in Biloxi in an unusual show of industry cooperation to form a group marketing effort, creating “Casino Row.”
“Every property on the Gulf Coast has been marketing itself as a ‘Total Resort Destination’ for a number of years,” Isle’s Hinkley says. “But joining with Casino Magic and Grand Casino Biloxi, we created a destination in and of itself.”

Casino Row launched its first marketing initiative last summer with a joint car giveaway.

Casino Magic Biloxi General Manager John Ferrucci says the group can more effectively compete with Beau Rivage by pooling its marketing dollars.

‘Nobody is doing well in Tunica’
Tunica County, which is celebrating its 10th anniversary of gaming this year, has grown from a single riverboat and a dozen hotel rooms in 1992 to 10 casinos, 6,300 hotels rooms, 40 restaurants, seven theaters, four spas and an outlet mall.

As Tunica’s amenities have continued to expand, its casinos have been engaged in intense marketing wars.
Like the Gulf Coast, gaming revenues for the Tunica market have climbed every year since Splash Casino opened the first slots and gaming tables in the county in 1992. But profits are another story; they have shrunk steadily in recent years at many Tunica casinos.

“Nobody is doing well in Tunica,” analyst Davila says. “It’s reflective of the promotional environment, not the economy.”

“The heavy promotional environment in Tunica will continue to erode EBITDA margins,” Bear Stearns’ Hausler says. “The Tunica market is oversupplied. I don’t know if operators need to exit the market or just reduce the number of positions. The competitive environment is still difficult and the cost of marketing is still very high.”

Horseshoe Casino started Tunica’s marketing wars about four years ago when it kicked off a major promotion offering the locally unheard-of 16-times odds on craps. The promotion quickly elevated Horseshoe—one of the smallest casinos in the county—to the market’s revenue leader, and it has remained there ever since.

The property has been one of the few to maintain EBITDA growth alongside revenue growth. Fourth- quarter 2001 revenues at Horseshoe Tunica topped $61 million, up some 7 percent over the final quarter in 2000, primarily the result of an increase in slot and table game volume from a $40 million expansion completed in late 2000. EBITDA also rose some 17 percent to $19.6 million.

Horseshoe Tunica General Manager Bob McQueen says the expansion didn’t stimulate the expected growth last year because of the economic downturn and the terrorist attacks.

As soon as revenues returned to normal, the marketing wars resumed, he says.

“Promotional costs have been a consideration,” McQueen says. “The increase in margins in fourth-quarter 2001 is largely attributable to the elimination of disruptions associated with the opening of the expansion, which impacted the same quarter in 2000.”
But some Tunica casinos have been able to hold down promotional costs.

Joan Robinson, marketing director at Harrah’s Tunica, says the limited number of new markets opening for development in recent years has steered most casino operators toward reinvesting in existing markets to attract players, which has led to more intense competition in those markets.

Having worked in marketing departments at Sam’s Town and Grand Casino Tunica, Robinson is wary of jumping into casino marketing wars.

“The numerous expansion projects by Tunica casinos has resulted in supply growing at a faster pace than demand in this market,” Robinson says. “As a result, competition has increased significantly.

“Harrah’s continues to focus on marketing to its Total Rewards players and on targeting new players through this program,” she says.

Harrah’s two casino properties in Tunica and Vicksburg, Miss., jointly reported revenue increases of 2.8 percent in 2001, while operating profits climbed 47 percent in 2001 as a result of the higher revenues and increased cost-efficiency efforts.

Another Tunica casino that chose to tone down marketing costs in the face of the economic downturn followed by the Sept. 11 attacks was Boyd Gaming’s Sam’s Town. During fourth-quarter 2001, Sam’s Town Tunica posted a 9 percent increase in revenues to nearly $24 million, while EBITDA improved 135 percent to $1.6 million from a $4.6 million loss.

“The Memphis-Tunica economy had shown signs of decline since spring 2000,” says Maunty Collins, vice president of Boyd’s central region. “The terrorist attacks sped up the process, so we materially reduced operating costs, especially marketing costs.”

Now that business has returned to normal levels, Sam’s Town Tunica is kicking off its latest promotion is its first annual River Run Motorcycle Extravaganza this month. The motorcycle festival includes a motorcycle and accessory manufacturers’ show at the casino property with a concert by Creedence Clearwater Revisited, celebrity appearances, a charity golf tournament, motorcycle treasure hunt and a live taping of the “Steel Dreams” motor sports cable TV show.

“Anytime any one of us tries something new—whether it’s a promotion, advertising or direct mail campaign or cash giveaway—all the properties in town see some short-term business diversion,” says Rick White, senior marketing director at Sam’s Town.

Fourth-quarter 2001 revenues at Hollywood Casino fell 5.1 percent to nearly $23 million, while EBITDA inched up 4.2 percent to $5.2 million.

John Osborne, general manager of Hollywood Casino, says it plans to increase cash flow slowly over the next few years, continuing to be a steady performer.

“Hollywood Tunica casino’s strong operating results in the fourth quarter reflect our aggressive management of the property,” Osborne says. “We have continued to significantly reduce operating costs while maintaining our superior level of customer service.

“Our rise in EBIDTA despite a drop in revenues reflects our dedication to a disciplined and consistent management of our marketing despite continued difficult market conditions,” he says.

Isle of Capri became the first operator to voluntarily bail out of Casino Strip in Tunica. Other Tunica operators such as Treasure Bay have withdrawn after falling into bankruptcy, but Isle chose to reevaluate the market after investing some $33 million in a new hotel and tallying up the high promotional costs.

In March, Isle put its Tunica casino up for sale, citing continued losses since entering the market in July 1999. Isle President Jack Gallaway says the property won’t be closed.

“We were in a weak location, and we were last in the market, and hopefully somebody can do a better job than us,” Gallaway says.

Isle bought the Tunica property from Harrah’s Entertainment for about $50 million and spent about $33.5 million to renovate the casino and add a 235-room hotel and two theaters. It was the last major gaming-related investment in Tunica County.

For the third quarter that ended Jan. 27, Isle Tunica reported revenues of $6.4 million, down 8.5 percent from the previous year. EBITDA posted an $870,000 loss, compared to a $3.3 million loss the previous year.
While no buyer had been announced at press time, Isle officials are hopeful the property can be sold rather than shut down.

Another Tunica operator that analysts agree needs to change its footprint in the market is Park Place Entertainment, which now owns three Tunica casinos.
Park Place combines revenues of Sheraton with its Bally’s properties in Tunica and New Orleans. Last year’s revenues for the trio, $189 million, were down about 5 percent, and EBITDA fell nearly 12 percent to $30 million.

Last December, Sheraton Tunica heated up the marketing wars by reprogramming 1,250 slots to offer higher percentage payouts than Tunica’s other nine competitors.

Eileen Duffin, Tunica regional marketing vice president for Park Place’s Mid-South Region, says the initiative has helped pump up revenues.

Sheraton’s higher slot payout enabled the casino to differentiate itself from its competitors, Duffin says. Sheraton has promoted the change with orange-and-white bulls-eye billboards, newspaper ads and TV spots.

Sheraton’s promotion featuring higher slot payouts duplicated similar promotions held in the past by Hollywood and Fitzgerald’s.

“If you want to buy market share, big giveaways and promotions and advertising will do the job,” Davila says. “But they are risky; they will cost you money and can erode your bottom line.”

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