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Cancel, Scale Back or Economize?

The right construction strategy in a distressed economy

Cancel, Scale Back or Economize?

Throughout the past several months, the gaming industry has seen an increasing number of development projects fall victim to the ongoing credit crisis and the lack of consumer spending. Construction sites once lauded for their unprecedented volume and the rapid emergence of their dramatic towers have suddenly become equally notorious for their voluntarily delayed schedules and darkened project sites. The wave of bad news has many wondering… who will be next?

At first glance, the pendulum swing from “full speed ahead” to “hit the lights on your way out” is just one more indication of a once-impenetrable industry finally showing signs of vulnerability. While it is hard for anyone to argue that a growing collection of delayed or canceled projects is good news, we should also consider that the recent shift may be generating some level of optimism, if for no other reason than it hints at a renaissance of reality so notably absent from the industry in recent years.

Granted, it is difficult for any entity to cancel, scale back or economize a planned development (especially those whose project is already in the ground), but sometimes it is simply necessary. In the coming months and years, though, we will likely see that the owners willing to make those tough decisions and adopt a deliberate, market-appropriate construction strategy will find themselves not only better weathering these unprecedented turbulent times, but also in an enhanced position to capture market share when the economy improves.

A Strong Dose Of Reality

Gaming as an industry has traditionally been exceptionally resilient, holding strong through most of the economic downturns. But as we all now know, the recession of 2008/2009 is proving unsympathetic to even the most diverse industries.

This environment is particularly trying for those of you who have a significant project already under construction. If you are like the majority of your gaming peers, your company’s ability to obtain financing has been impacted, and you are in need of a solution that addresses short-term economic considerations while simultaneously minimizing the long-term impact that a delay or stoppage can have on your business.

Your first priority should be to make sure you have a grasp of the realities of the status quo. Even if it hurts, you need to know where you stand, what you have spent and have left to spend, and what you can salvage of your investment to date. The findings may not be pretty, but with this arsenal of information behind you, you can begin to meet with your internal management, creditors and consultants to discuss your options. It is also important that you review your obligations and rights with legal advisors before any formal discussions about delays, stoppages or concessions come into play.

To Build Or Not To Build

The decision to cancel a project is not one to take lightly. If you are lucky enough to have the option to decide the best course of action for your organization (i.e., your creditors aren’t making the call for you), there are a number of key questions you must ask before you decide to cancel, scale back or economize. Do your research and, if necessary, hire outside consultants to help make sure that you understand your financial picture and regional market conditions. Engage your design and construction consultants to review all of the potential impacts of a delay or stoppage.

Since the answers to such questions vary by location, the remainder of this article looks at regional-specific considerations impacting the primary markets of Las Vegas, Atlantic City and the Gulf Coast, as well as for other regional casinos across the country.

LAS VEGAS

There are several priorities for Las Vegas properties in the foreseeable future: continue minimum capital expenditure investments to maintain property quality (and therefore market share); prioritize “right-sizing,” which may mean program changes/eliminations, phasing plans, delays or cancellations; and think ahead-even if it is difficult in light of tremendous current challenges-to how the property should be positioned when the economy improves.

Up until last year, Las Vegas was in the midst of a huge construction boom focused on “mega” developments. Almost like self-sustaining cities, each was planned to have a broad mix of amenities. Some inclusions were key, cash flow-contributing components, while others were part of a value-added equation with minimal direct returns. Such loss-leaders were valuable for the incremental revenue they brought at the peak, but are now a key reason why the drop in consumer spending has had a more severe impact.

The initial task, then, for a mega-type project currently in progress is to triage these components. A basic ROI analysis will help you classify your planned scope elements into a spectrum of three categories: profitable, mid-level and unprofitable. When it comes to pending construction in this environment, your aim is to implement as much of the former and eliminate as much of the latter as possible.

The harder part will be your implementation plan for the amenities in the middle of your ROI spectrum. These are the functions whose projections depend to a large degree on regional market demand, assessments of when the economy will turn, and to what extent it will recover.

ATLANTIC CITY

Potential projects and projects already under way in the Atlantic City market present a simpler set of choices, primarily because they were/are going to be more focused in their program. Developers and operators here are faced with relatively straightforward “go” or “no go” decisions on projects in their entirety. As we have seen with Atlantic City’s large projects in recent weeks, the preferred option at this time is “no go.” The current serious market slowdown and the concurrent continuing rise of competing gaming options in the Northeast region speak to the need for a full reassessment of how each Atlantic City property sees itself as most effectively marketable in this new environment.

So the first step for most Atlantic City properties will be to gracefully and efficiently stop any current construction and development projects, and likewise to tie up and set aside any projects in the planning and drawing stages. Once the slate has been cleared, it will be time to do some serious analysis of market projections and to assess your relative position within these markets.

Economic realities are going to dictate for some time going forward that Atlantic City will not develop into a collection of Borgata-like, high-end, big-dollar properties. Instead, each property needs to evaluate its present competition to understand what they do better than you, and where you might target efforts to differentiate yourself within the pack.

It will likely not be possible to achieve a goal in this financing and revenue market to become the non plus ultra all-suite hotel property, but it will be possible, and in fact necessary, to define a niche that you can market around. If you haven’t done so already, get experts on board now to help determine the right course of action. If it’s to offer a brew-pub-based sports bar with new brews each month, offer a reasonably priced romantic weekend package with a hip-hop theme, offer “Always The Newest Slots,” a holistic “green” spa experience or celebrity chef restaurants at different price points, develop and offer focused amenities and facilities that set you apart from your peers. It is no longer realistic for Atlantic City operators to plan to hit the ground at a best-of-everything level. Instead, aim to capture and retain market share by having the absolute best-of-something up your sleeve.

When you find your niche and define your opportunities, take the time to plan your moves carefully. There is no rush to the finish line in this market. Projects will take time to make it to reality anyway, so use the time to plan them carefully. Spend some extra time planning theme execution and finessing design. Tune menus and projected staffing plans and proposed goods and services. Then, tune them again. There is no excuse for not having things right and operating like a well-oiled machine at this juncture. Customer service is everything when you are competing in today’s market.  

GULF COAST

If there is such a thing as a stable gaming market in today’s economic environment, the Gulf Coast is probably it. The level of optimism is higher along the Gulf than the rest of the country, and the numbers being generated by the gaming operators there are not as erratic as we are seeing in other key markets.

As such, properties along the Gulf should be prioritizing their preparation for market recovery. For many, this still means post-storm rebuilding, even if anemic credit markets limit initial investment to planning/design services. As for the operators whose projects have been stopped in this area, they should (at a minimum) be actively evaluating their competition and developing their wish list for the turnaround, since as the overall market heals, delayed projects are certain to come back to life in this region.

Life on the Gulf Coast will continue to grow at a steady pace due to the large population available to drive the market. The gaming industry should be looking at this region for its comparative stability throughout this economic crisis as well as the opportunity to drive traffic, win customers and build loyalty through the planning of new and diverse entertainment amenities.

REGIONAL CASINOS

If you are in an area of the country that the real estate bubble never really reached, consider yourself very lucky. The local economy in these areas is still moving forward slowly or even with growth compared to the rest of the country. Similarly, regional gaming facilities in these communities are performing significantly better than their counterparts in other markets.

Even with relative stability, however, owners need to be very careful about what is invested in these markets right now. We see and support properties finishing the projects they currently have on the books, and doing so with tight oversight of the budget. These expansions are focusing only on amenities appropriate to the market, and rightly so. Operators should keep a close eye on their surrounding markets looking for signs of recovery, or potential slippage in the guest count.

In the meantime, regional operators are pursuing only tightly focused, modest expansion plans as local visitors will prove to be the most resilient market through the recession. Recognize that this is the time for you to win new customers and build customer loyalty. Consider only strategic amenities that are proven winners in your regional market.

Moving Forward

For projects that remain a “go” in any region, work with your consultant team to define how to make all of the parts more efficient. For example, a new hotel tower may be critical to your operations, but the convention center it was originally designed above may not. Be creative with and open-minded to your options. Always aim to avoid substantial re-design costs by determining if the plan naturally lends itself to program exclusions, or if you can save comparable dollars by delaying the fit-out (interior design, etc.) of non-priority shelled spaces. In this example, emphasize the quality of the hotel tower, and finish the interior elements of the meeting space later.

If you need to leave secured spaces unfinished for a time, preserve the investment of construction dollars already in place by completing the minimum necessary to allow the space to comfortably weather a period of what may be two to four years before construction recommences (i.e., temporary roofing/skins, moving equipment to off-site storage, and paying cancellation charges and restocking fees for order items that will no longer be received).

As a general rule, if you are well into a project, it tends to be more cost-effective to allow your architect to finish design documents, even if you will not start construction for some time. If you stop the design process, it will render the plans significantly more costly for the completion of the project later. Consult your architect to make a clean break in the drawings if you have to stop, but recognize that the team working on your project now will likely not be available if you have to restart the process. The value of such continuity is difficult to put a price tag on, and should be factored into your decision.

Clearly, the right construction strategy varies significantly from market to market, and while we have structured our discussion here by region, there will be overlap of situations and recommendations across regions. Regardless of your location, though, it is important that you be thorough and realistic in determining your path, open-minded to all of your options, and deliberate in executing the strategy.

Right-size for your conditions, stop or delay in the most cost-effective way possible, continue to invest what you need to in order to maintain your current client base, and plan, prepare and position for the future… even if that is difficult to do at this point. Down the road, you will be glad you did.

Bob Kelly is president of Innovation Project Development, an owner representative entity based in Ocean Springs, Mississippi and affiliate of the Innovation Group of Companies. Kelly’s background includes a 16-year career with various divisions of Harrah’s, where he was responsible for the design and development of gaming and hospitality projects throughout the world. He can be reached at 228-248-0088 or [email protected]

Steve Rittvo is chairman of the Innovation Group of Companies-a group of affiliates whose broad range of expertise and experience covers almost every aspect of the casino/resort economic development process: The Innovation Group to consult, Innovation Capital to finance and advise, Innovation Project Development to coordinate build-out, Innovation Marketing to position and Innovation Management to operate. Rittvo can be reached at 970-927-1400 or [email protected]

Steve Rittvo is chairman of the Innovation Group of Companies-a group of affiliates whose broad range of expertise and experience covers almost every aspect of the casino/resort economic development process: The Innovation Group to consult, Innovation Capital to finance and advise, Innovation Project Development to coordinate build-out, Innovation Marketing to position and Innovation Management to operate. Rittvo can be reached at 970-927-1400 or [email protected].

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