The announcement of the commencement of CityCenter in November 2004 was a milestone for the company then known as MGM Mirage. The property, built on the site of the former Boardwalk hotel and other land between Monte Carlo and Bellagio, would be the most expensive private development in United States history, at more than billion—which eventually ballooned to more than billion. CityCenter was to become just that—the center of the new city of Las Vegas; the blueprint for modern urban life in the 21st century.
And then the recession hit. Without documenting the individual economic and architectural reasons surrounding the struggle to erect CityCenter, it was a project that nearly sunk the company. But in the meantime, even before CityCenter opened, a decision was made that has created a more lasting impact on the company. The board of directors decided to change the corporate philosophy that encouraged competition between properties and individual entrepreneurialism to one where they would all work together for the common good.
Chairman and CEO James Murren, who declined to be interviewed for this feature, decided that by leveraging the company’s powerful brands and creating efficiencies of scale, MGM and all its properties would benefit directly. But first, there was the little item of CityCenter to get open.
The debut of CityCenter in December 2009 was accomplished with a minimum of fanfare. For a $9 billion investment, MGM Resorts had decided to low-key the opening for a variety of reasons, not the least of which was the struggling economy and a perception that an over-the-top celebration may have been out of place.
But perhaps the struggle the company endured while building the place contributed to a sense of relief rather than celebration. CityCenter had almost sunk MGM Resorts, and an all-out celebration may have been interpreted as whistling past the graveyard.
It didn’t help that the reviews of the facility weren’t universally good. While the architecture was stunning—as it should have been from the collection of world-class designers and architects assembled by MGM—some questioned whether it really represented what visitors to Las Vegas were looking for. And details like traffic flow, the layout and lighting in the Aria casino, and the setback from the Las Vegas Strip were also criticized. So the low-key ceremony and subsequent slow ramp-up of business to the facility were perfectly matched.
The company’s debt crisis and the subsequent soft launch of CityCenter led to a soul-searching rarely seen in corporate America. Dan D’Arrigo, the MGM Resorts chief financial officer, says every property and department was involved.
“We were faced with many challenges over a 24-month period,” he explains. “We were focused on getting to the finish line with CityCenter and then shoring up our own finances and liquidity as it pertains to MGM Resorts. We were able to do a lot of things during that time, however, that a lot of companies could not do, including raising capital and improving our liquidity. What gets lost often is the fact that this company raised over $7 billion in liquidity during some of the darkest financial times when capital markets were closed. Bond markets were closed and there was no lending going on at all. And $3 billion of that was raised on behalf of our joint venture with Dubai World for CityCenter. We also raised money for our Macau joint venture last year. It was a lot of effort.”
At the same time, D’Arrigo says, the company looked at operations.
“We put together over $700 million in annual cost savings throughout the various facets of the business,” he says. “We succeeded in refocusing and re-engineering the business in what is really the world we see today. It was a true accomplishment that we worked hard to achieve.”
With a spiraling economy, mounting debt and construction problems, D’Arrigo says it became apparent CityCenter must go forward.
“We looked at many different options for CityCenter as we worked through that problem,” he says. “Both we and our partners looked at slowing towers down and scaling towers back. We did in the case of the Harmon, for a variety of reasons. In the end, every analysis we did told us we had to finish the project. We were too close to the finish line and the revenues, the potential was too great. And actually, the best return on our investment was the final dollars we put into that. We put our money—as we like to say in the casino business—‘all in’ and brought the project to its completion.”
Now that it’s open, D’Arrigo says despite the slow ramp-up period, he’s confident that it will succeed. He points out that occupancy rates have steadily risen from the 60s and now hover in the 80s for the hotel rooms at CityCenter.
“It’s been a slower process than any of us had anticipated, but when we opened CityCenter in late ’09 and particularly Aria, the main revenue-generator of the campus, we simply could not get the consumers’ attention,” he says. “That was a process that continued through last year. We really had to gain the brand recognition. If they were going to spend the money, they were going to spend it on a place that they knew. So we really had to win the confidence of the consumers. And we have been doing that. Aria is now on a solid financial footing and well on its way to being the cash flow-generator that we thought it would be.”
Bill Hornbuckle, MGM Resorts senior vice president of marketing, says the company’s positioning of Aria in the beginning may have been too aggressive .
“After spending $9 billion, we had hoped that Aria would be the pinnacle of all MGM Resorts products,” he says. “We’ve come to realize that Aria hosts a unique customer. We’ve discovered that Bellagio, foundationally, is still the queen of the ball. It has an older and more international clientele who know Bellagio and like it. They understand they can go visit Aria and all it has to offer, but they like the Bellagio. There has been some convergence from people who want to stay there the next trip. But by its very nature, the demographic at Aria is younger. The position right now is about 10 percent lower than Bellagio. And believe me, we’ve debated it. In the end, we let the market determine the positioning. Will it be that way forever? We don’t know that yet, but that’s where we are now. Time will tell.”
Today, the future of MGM Resorts is no longer hinged to CityCenter, although it remains an important cog in the company’s wheel. It is responsible for a good chunk of revenue, as well as a large part of the MGM debt.
Debt Will Tell
The crisis confronting MGM Resorts in 2008 was a crushing level of debt with maturities rapidly approaching. D’Arrigo explains that the bonds were refinanced at different rates and the maturity was pushed out. Now, the company is free to improve the balance sheet before the next bond comes due.
“On the corporate level, we raised enough liquidity to get us into 2013,” he says. “We raised enough to pay off $130 million due later this year, and about another $550 million due in September of next year. With over $800 million in bank capacity we should be able to handle both of these obligations. We have sufficient liquidity to get us through 2012 and into 2013. This gives us enough runway over the next few years to allow the people who run our buildings to focus on operations and continue to improve. And it gives us an opportunity to step back from the capital-raising aspect of the business to be a little bit more opportunistic and strategic going forward.”
One of the strategies considered for helping to solve the debt crisis was selling underperforming or non-core properties. Outside of the sale of Treasure Island to Phil Ruffin in 2007 for $775 million, D’Arrigo said it just didn’t make sense.
“We did look at selling several of our regional properties and quite frankly, the conclusions we reached with our financial advisers and our bankers was that they weren’t transactions that would improve the balance sheet,” he says. “In fact, any sales would have put more stress on the balance sheet. We do over $250 million in cash flow from our regional properties, which is pretty significant in the overall health of the company. There is very little capital required in each of them. They are new facilities essentially—MGM Detroit is one of the newest properties in our portfolio and Beau Rivage got a complete makeover after the unfortunate effects of Hurricane Katrina—and they are both the market leaders.
“We bought ourselves a lot of time, so it took pressure off us having to sell any assets. They’re like all your children. It’s hard to pick any one out. So we’re out of the asset-sale business at this time.”
With the purchase of Mirage Resorts in 2000 and Mandalay Resorts five years later, MGM Resorts has accumulated some of the most powerful brands in gaming. While some are region-specific or theme-based, Hornbuckle explains what brands the company believes are most powerful.
“All our brands are unique and can stand alone,” he says. “But clearly the one we’ve benchmarked is the legacy brand of MGM. With it comes the corporate identification and all that comes along with that. It has connotations in entertainment, movies, gaming and resorts. We’ve put this brand out there the most, including in MGM Hospitality. Bellagio is a follow-on and is used in very unique opportunities. And SkyLofts, a product that sits atop MGM Grand in Las Vegas, has achieved its own brand niche as a hospitality product. There are others that are portable, but these three are the focus of the company right now.”
D’Arrigo says, as the CFO, all products have to stand on their own.
“We look at each of our brands and buildings individually,” he says. “Some have been better performers than others and some are just at different price points and customer levels. You look at a Bellagio brand different that you do a Luxor or Excalibur brand, whether you look at it from a revenue or an expenditure perspective. For example, it might be easier for a Bellagio to come in and request a capital expenditure and justify a return on investment of that capital than it might be for a mid-tier property to do the same.”
By combining the marketing under corporate control in the recent board decision, D’Arrigo believes the entire company will benefit.
“What we’re trying to do is make each property better,” he says. “In some properties, we’ve gone to more of a shared service platform behind the scenes, which has been very helpful for some of the mid-tier properties. We’ve consolidated some of the services like payroll, human resources, accounts payable and receivable… It takes some burden off the properties and allows the management teams to concentrate on operations.”
Hornbuckle says the need to market jointly wasn’t necessary until the economy took a tumble.
“If you go back to 2004, 2005… Those were great years for the industry,” he explains. “The notion that you had to collectively market was not apparent. What did you need more than Bellagio or the Mirage or MGM? It just wasn’t the focus of the company.”
But the economic downturn produced a reality check… and a revelation.
“One thing became crystal clear to us. We weren’t effectively leveraging who we are and who we were as an entity,” he says.
MMMarvelous M life
Long lagging behind the industry-leading players club, Caesars Entertainment’s Total Rewards, MGM Resorts set to close the gap recently with the debut of M life, the comprehensive rewards program that will span all MGM Resorts casino and non-gaming hotels and resorts. Hornbuckle says the new program was long overdue, and replaces a program that had few bells and whistles.
“We merged all of our contacts into our players club when we bought Mirage, Mandalay and others,” he says. “It was pretty single-dimensional and primarily slot-focused. It wasn’t designed to be aspirational. It did not have a tier classification. The reward mechanisms weren’t based on the theory ‘the more you played the more you got.’ Therefore, it wasn’t transparent. Unlike a lot of programs in the industry, you had to ask for a comp at the players club booth or pick up a phone, call the VIP center and find out what you were entitled to.
“With M life in all of our major properties now, we’ve corrected all the problems of the previous program. It’s tiered, so it’s aspirational. The key to that is as you go up the tiers—from Sapphire to Pearl to Gold to Platinum—not only do you get more benefits, but the economic rewards escalate as well. It’s pure math. So that is now transparent. You can view your account at kiosks or online to see exactly what you are entitled to. Customer reaction to date has been great. There’s also a fifth undisclosed level, Black, that is for our elite players.”
But it wasn’t—and isn’t—cheap.
“I asked Jim Murren last year for $20 million to $25 million a year to develop these systems,” says Hornbuckle. “It’s a lot of money, but in the great scheme of things, it’s not, if in five years we can know everything there is to know about our most valuable customers, and more importantly know what motivates them. It will all be worth it.”
D’Arrigo is ready with a financial evaluation when the time comes.
“We’re going to gauge the impact in a variety of ways,” he says. “Clearly, the contribution we get both in terms of our revenues and our cash flow, how we track, how we can better market to customers, is going to have the most direct impact. But also, the savings aspect is important. Today, we have a lot of programs that may not be the most profitable. We’ll be able to better gauge who is deserving of comps and other benefits. Over time, we’ll see that traction and the building of customer loyalty.”
With 29 million members of the existing players club and a complete database of more than 60 million, M life will do more than just track the play of customers, according to Hornbuckle.
“The average visitor to Las Vegas comes here 1.1 times a year,” he explains. “So what happens if we get them two times? Quite a lot, actually. The Las Vegas visitor isn’t as loyal as we want them to be. They are very price-conscious and we’ve seen them move for $10 from one resort to another—maybe one we own, but maybe not. So what’s the leverage to keep them here?”
M life will also educate the players as to exactly what MGM is.
“If I ask some of our better consumers to name the 12 MGM properties on the Strip, they get to three or four and then lose track,” says Hornbuckle. “They don’t know what we are. So how can I force loyalty if they don’t know what we are? But if they know they can walk out of Bellagio and go to Monte Carlo for a steak, and they’re going to get rewarded, they’ll start to figure it out. That’s our first key measure, to get them to understand our portfolio and what we offer, because at every level and every price point, we’ve got enough product. We just need to educate them.”
When phase two of M life launches, MGM’s non-gaming customers will be included.
“This summer, we’re going to launch M life Privileges, which is the working title, anyway,” says Hornbuckle. “And this will eventually be folded into the program. This considers the totality of your spend, since 60 percent of our revenues are non-gaming. It’s difficult at our scale to do. We’ve gotten very astute at our database and marketing to that database using predictive analytics.”
MGM has embarked on an aggressive program that takes the common “theoretical win” analysis to the next level. Hornbuckle says the tried-and-true theoretical is only accurate about 25 percent of the time.
“We have built a new customer value matrix that looks at almost 300 different variables that we think triples the likelihood of predicting the money you spend with us on the next trip,” he says. “So we can predict in the 60 percent range whether a customer will spend what we need him to spend. Then we can make an informed decision about what we can reasonably offer him.”
The same matrix is being developed for non-gaming customers, as well.
“We’ve gotten to that level for gaming,” he says. “We want to take that to the next level and be able to apply it to non-gaming spend. I think we can do it.”
Former MGM Chairman Terry Lanni was fond of predicting the convergence of the gaming and entertainment industries at some point in the future. While we might be still waiting for that ultimate merger, there are some more symbiotic businesses that are currently part of the gaming industry.
The renaming of MGM Mirage to MGM Resorts was not simply a corporate exercise, but it was designed to point out that the company was more than just gaming. The proof is the establishment several years ago of MGM Hospitality, a division of the company focused on non-gaming (and occasional gaming) properties. Led by former MGM Grand President Gamal Aziz, MGM Hospitality now has 20 contracts to build hotels in some diverse nations around the world, including Egypt, Abu Dhabi, Vietnam (with gaming) and China.
Aziz says the idea for MGM Hospitality came from outside sources.
“We had inquiries from a lot of people around the world who were interested in utilizing our brands,” he says. “At that time we were just interested in gaming, but being a hotel person, I saw an opportunity for our extraordinary experience in hospitality. We could place them in cities where we have customers who come to Las Vegas and would like to have the same experiences in their own countries.”
Because MGM Resorts was focused on gaming, Aziz recognized business models of hospitality companies where significant financial investment was not required. MGM currently has no ownership or financial stake in any of its 20 contracts.
“Our business model is ‘capital light,’” he laughs. “We’re basically a management company that provides management along with our brands around the world. They will survive and thrive because of what is in the market. Our model is the hospitality and resort companies that have done this for years and have managed to create tremendous value for their shareholders.”
He cites Marriott and Four Seasons as two successful companies that employ a similar model in the hospitality sector. But because MGM is known for other things beyond gaming, Aziz says it can create that excitement without a casino.
“We’ve created a business model that makes the facility a resort destination,” he explains. “It’s similar to what we did when we opened Bellagio in 1998. The casino was part of it but it wasn’t the center of its attraction. The attractions are the incredible amenities: the restaurants, the spa, the shops, the hotel, the lounges and nightclubs, the shows and all of the other entertainment aspects of this resort destination.
“We took that same mentality to the countries around the world where we want to operate. Unlike a traditional hotel company, we’ll be providing retail, entertainment and other amenities. It goes beyond just your normal everyday box with places to sleep and a place to eat breakfast. It’s a holistic experience. It takes what we’ve learned over the years in Las Vegas and provides that kind of hospitality.”
Gaming can also be part of this equation, however. On the Ho Tram Strip in Vietnam, MGM will manage a casino resort owned by Asian Coast Development, led by a former MGM executive, Lloyd Nathan. Aziz says gaming is a component of the portfolio, however, and lists gaming opportunities in Taiwan, South Korea and the Philippines as high on his “to-do” list.
While no MGM non-gaming hotel has yet opened, it will happen soon. An MGM Grand resort on the Chinese resort island of Sanya will open in October.
“Many call Sanya the Hawaii of China,” says Aziz. “It has about 670 rooms right on the beach in an incredibly beautiful setting. It’s only 55 minutes away from Hong Kong.”
MGM’s partner in China is the government-owned hotel firm, Diaoyutai State Guesthouse. The company has many contracts with Diaoyutai across China. Two small boutique casinos, branded as Diaoyutai hotels, will open in 2012, one in Beijing and another in Chengdu. Aziz says goal is to spread the MGM name across the most populous country on earth.
“Those hotels will have the same elements and qualities that we have in our company around the world,” he says. “It will help tourism and travel to our properties, and that’s the intention. If you are a Chinese citizen who has experienced an MGM or a Bellagio, on your travel to Las Vegas or Macau or any destination where we have resorts, we’re bound to be their No. 1 choice.”
Aziz is excited about how fast his division has grown.
“When we started this company three years ago, I thought it would be great to have five hotels in the first five years,” he says. “But with 20 contracts signed, I’m now telling our team it would be great to have 50 hotels in five years. Our aspirations for this company keep growing higher and higher. It’s not about quantity, however; it’s about quality. We have billions invested here in Las Vegas, so you can’t just put them down anywhere. They must represent the quality we have in Vegas.”
With the recent announcement that MGM will take over majority ownership of its Macau casino (see below), the future of the company in that Chinese Special Administrative District becomes more important.
Even before the announcement, D’Arrigo said there has been a great effort by the Macau team to improve results there.
“We have been very focused on improving our presence in Macau, in conjunction with our partner,” he says. “Our management team has done a fantastic job, along with Bill Hornbuckle, here at corporate, spearheading that marketing effort. We’re pleased that the initiatives we laid out for management in late 2009 have really taken hold and they’ve turned the corner. We’re looking at expanding in the current facility. We have about 70,000 square feet of build-out space in the existing building, and our discussions with the government about expansion into the Cotai site are well advanced.”
Hornbuckle says marketing the property is totally unlike marketing in the United States.
“You can’t advertise gaming in China,” he points out. “You can advertise resorts, but not gaming. The penetration of Chinese customers into Macau is still less than 1 percent. When you think about that number, customers we know come often, as many as 10 times a year. So the number is even less, perhaps one-third of 1 percent.”
Hornbuckle says the partnership with Diaoyutai State Guesthouse is crucial.
“That will bring the MGM brand into China but not the gaming, just tourism and hospitality,” he says. “We think we’ll wake up within this decade and have 20 active MGM and Bellagio properties on the Chinese mainland and resort areas—the hospitality, the service, the branding, the name will become known for that. And oh, by the way, in Macau we have this piece of business. I think this strategy, although it’s not easy to do and won’t happen overnight, is as solid as a rock for that market.”
D’Arrigo says one of the reasons MGM Grand Macau took some time to ramp up was the company’s desire to be compliant in all cases, something not easily done in Macau.
“We may be one of the only operators in Macau that has a compliance committee that reports to the joint venture board,” he says. “We spend a lot of time vetting who we do business with and how our policies and procedures are conducted—not just in Macau, but at all our properties. It’s something we take very seriously. We got out of the gate very slow in Macau initially because we weren’t ready to dive head-first into the market. We wanted to make sure we covered all of our bases with respect to our compliance.”
Like all gaming companies, MGM Resorts is struggling to figure out how to monetize the social media that are revolutionizing communications with customers. Hornbuckle says MGM is dabbling in all parts of this sector to see what works.
“We’re ubiquitous, which is kind of dangerous,” he laughs, “but we’re going to be represented in all the avenues of social media that are currently out there. We’ve built dozens of apps with more to come. Every aspect of the company will have an app in some shape or form. We’re using a crawl, walk, run strategy. We’ve got a couple of properties we’re using to benchmark results. We’re having daily dialogue with customers. We’ve got key words planted so we try to respond to it.”
Hornbuckle has an interesting twist, however, that will identify the “movers and shakers” in certain groups and target them for benefits.
“We’re aiming at tribal leaders,” he says. “When they come to Vegas, they come in pods, they come in tribes. There’s always a tribal leader—setting up the trip, whether it’s a bachelor’s party, sports getaway weekend or whatever. Now there’s going to be a mechanism where the leader can share his plans with his tribe—his social network. ‘I’m going to Vegas, here’s my plans, join me.’ He’s going to be recognized and rewarded for that. Tribal marketing through social networking. This is going to pay dividends, we believe.”
As for internet gaming, MGM Resorts is singing from the same songbook as the rest of the major gaming companies: Everyone wants a federal bill to legalize the activity.
“It can be a big win for the industry and for the government,” he says. “Analysts conservatively measure poker gambling online between $1.2 billion and $1.5 billion, in an illegal market. France recently legalized it and the market tripled. So let’s conservatively say it doubles to a $3 billion market. And that’s just poker. High-tech jobs, tax revenues… We need to get it done.”
In the late 1990s, Hornbuckle spearheaded MGM’s efforts to get into online gaming in Europe, so he speaks with more authority than the typical casino executive.
“The people who play now are comfortable on the major sites,” he says. “But there’s many more people who would not be comfortable at all unless you put MGM’s name on it or another major gaming company’s brand. People will play it. But they’re not going to touch it unless there’s something they understand.”