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HOME > NEWS > Investor News > Third parties help casinos draw patrons

Third parties help casinos draw patrons

3 September 2012

By Chris Sieroty

There was a time when Las Vegas casino bosses controlled everything on their properties, from the nightclub to restaurants and even the bar adjacent to the pool.

But times change. The idea of leasing out retail, club, sports book or restaurant space to a third-party operator is now woven into the fabric of the Las Vegas resort industry.

"Third-party operators have changed the casino business model," said Tony Henthorne, associate dean for research, graduate and international programs at the William F. Harrah College of Hotel Administration at the University of Nevada, Las Vegas. "It allows casinos to concentrate their efforts on what historically they've done really well. Their strength has always remained in gaming."

Henthorne said most casino operators are "smart enough" to surrender a little control in return for a much greater reward when a specialist with drawing power operates clubs, restaurants and or other amenities that are as much of a draw as their gaming tables.

The $3.9 billion Cosmopolitan of Las Vegas wasn't the first to seek out celebrity chefs, but the Strip's newest hotel concentrated on bringing in chefs who didn't already have restaurants in Las Vegas, and grouped most of its nine third-party operated restaurants in the hotel's third-floor P3 Commons.

That's a signature element that appeals to the "curious class" of consumers who like to explore interesting restaurants, hotels and shops. That sense of adventure has translated into packed restaurants nightly and revenue for Nevada Property 1 LLC, The Cosmopolitan's parent company.

The third-party restaurants - Comme Ça, STK, Estiatorio Milos, Scarpetta, Blue Ribbon Sushi & Grill, China Poblano, D.O.C.G., Holsteins and Jaleo - generated a substantial portion of the $154.67 million earned from food and beverage at the property in the first six months of this year.

During those same months, the hotel's casino brought in a relatively small $69.5 million.

The idea of using a third party to manage different businesses within a casino isn't new. For years, casino sports books have been run independently, with operators paying rent and a percentage of the profits to the house. Casino operators like that setup because it allows a third party with special expertise to set the odds, accept the wagers and take all the risk.

But hiring a third-party company isn't risk-free.

"The biggest concern has always been if a guest comes to a property, say Caesars Palace, and has a bad experience. Would they blame the hotel and then go gamble at The Mirage?" said Tom Kaplan, senior managing partner with the Wolfgang Puck Fine Dining Group.

Other potential setbacks include bad reviews, employee complaints, short-lived restaurants or lawsuits between owners. All have the potential to hurt the casino's reputation. After all, whose name is that on the big sign out front?

Take, for example, a recently settled sexual harassment lawsuit and a continuing employee wage lawsuit against celebrity chef Rick Moonen, who owns RM Seafood at Mandalay Bay Resort & Casino. Most media accounts of the case refer to "a lawsuit against a restaurant at Mandalay Bay," putting the casino in an unflattering position.

MGM Resorts International, Mandalay Bay's parent, did not respond to a request for comment.

CREATING BRAND LOYALTY

Wolfgang Puck is credited with starting the fine-dinning revolution in Las Vegas when he brought Spago to the Forum Shops at Caesars in 1992. Twenty years later, Puck has eight Las Vegas restaurants, including two part-year pool restaurants.

"We were really the first group to come to Vegas," Kaplan said. "The landscape is much more crowded today. It's about creating your own niche in a town with a lot of business."

Celebrity chefs joining Puck on the Strip include Bobby Flay, Gordon Ramsey, Hubert Keller, Emeril Lagasse, and Mario Batali.

If done well, Kaplan said, third-party operators can create a unique customer experience, which creates brand loyalty for the restaurant and casino.

"It's about creating brand loyalty with Puck and Caesars," he said. "That loyalty has worked for us and Caesars."

Kaplan credits much of Puck's success in Las Vegas to remembering one thing: "It's the casino's name on the big door" - in other words, club or restaurant owners who have a powerful brand name of their own must "put the ego away" and remember that their actions could affect more than their own business.

Robert Lopez, director of accounts with Johnson Gray advertising in Irvine, Calif., said both companies have to look out for each other's interests. Neither, he said, should rely solely on their own brands when marketing themselves.

"They need to realize that they are trying to brand a neighborhood," Lopez said, especially a shopping area like the Forum Shops.

He said the trick to third-party operators being successful in Las Vegas is defining, then capturing, a core audience.

Lopez said there has been so much growth in Las Vegas that many restaurants have gotten lost in the shuffle.

"There have been some great restaurants that have opened and then closed rather quickly," Lopez said. "There problem was they were unable to speak to an audience."

Although the economy remains sluggish and the restaurant business is risky, there are still investors willing to bankroll the next Wolfgang Puck.

Kaplan said with "capital tight right now," deals with celebrity chefs or well-known brand make financial sense for both parties. While declining to discuss specific deals, he said that in rare cases casinos companies have even stepped in to finance a $5 million to $6 million restaurant project when no bank would do so.

Kaplan's reluctance to talk about individual restaurant deals isn't unusual. In fact, he's one of the few consultants, attorneys, restaurant operators or analysts contacted for this article who was willing to say anything at all. When it comes to discussing lease terms or even standard contract clauses that might protect a resort property from embarrassment if a renter runs into trouble are simply not talked about in the closed world of resort restaurant deals.

The Palms Casino Resort, which is spending $50 million to upgrade the property's rooms, casino and other amenities, is relying on third-party companies such as The One Group, which will open Xishi, a pan-Asian restaurant, and Heraea at the Palms, a sports-themed restaurant.

The N9NE Group also has an extensive business relationship with the Palms, operating ghostbar, the Palms Pool & Bungalows, N9NE Steakhouse and Nove Italiano restaurant.

When asked about the resort's relationships with its major restaurant operators, Palms President Joseph Magliarditi declined to comment. In a statement, the company said only that the property has "forged many unique partnerships that have successfully brought the Palms brand to life.

"As we evolve we will continue looking both outside and within to create an energetic and sophisticated property experience," the company said.

REACHING INTO THE PAST

Although Strip operators may depend heavily on leased venues and third-party operators, Station Casinos LLC is turning back the clock to end leases and operate most restaurants itself.

Fifty-seven of the 67 restaurants companywide are owned and operated by Station Casinos.

The shift to owned-and-operated outlets began after the locals gaming company emerged from bankruptcy last year. Mark Lavoie, corporate vice president of food and beverage, said it was done to create consistent companywide brands. The advantage for Station is more control over food quality, employee quality and marketing and the ability to create brands that executives feel can stand on their own.

Lavoie said there is a "certain responsiveness we can bring with that control." He said the company can evolve its own brands more quickly than other national chains.

"They are not going to change quickly based on what a facility's needs are," Lavoie said. "They do what they do."

Since June 2011, the company rebranded the Italian restaurants at five of their properties. All are now Pasta Cucinas, a move to provide a consistent and recognizable brand across its properties. The company also replaced a number of Coco's and Denny's with its own Grand Cafe brand. Similarly, company officials took over the privately owned Camacho's Mexican restaurant and, along with its own Guadalajara Mexican restaurants, rebranded them as Cabo Mexican Restaurants.

Eateries controlled by Station, as opposed to those operated by outside chains, allow for more control and consistency across properties, Lavoie said.

"I don't think you are ever happy" with the status of the restaurants, Lavoie said. "Are we doing more than just feed our guests? Can you cut them out and would they be able to stand on their own? That's the slant we take on it."

MEETING HEIGHTENED EXPECTATIONS

Although Station has taken a number of brands in-house, the company still relies on third-party dining groups to round out a mix of restaurants aimed at serving its well-defined locals market.

Oliver Wharton, vice president of hospitality development, said the locals market has evolved, heightening expectations.

"Everybody is a foodie, because they all watch the Food Network," Wharton said. "It's not that they are looking to experience a cheap, cheery buffet at a great value. They actually have food and beverage dollars that are real."

The company has found success leasing venues to Yard House, Smashburger, and Lucille's Bar-B-Que, among others.

Wharton said the company courted Lucille's for a good decade before reaching a deal to bring the restaurant to Red Rock Casino, Resort & Spa next year. Lucille's has been serving its Texas-style brisket, tri-tip and other favorites since 2004 at The District at Green Valley Ranch.

"In The District, they are very successful," Wharton said. "I think they do $2,000 to $3,000 a day in takeaways. I think they'll be even more successful at Red Rock."

Wharton said Yard House's success helped in recruiting Lucille's to Red Rock Resort.

"It's been a successful partnership for three years," said Harald Herrmann, president and CEO of Irvine, Calif.-based Yard House USA Inc. He credited the company's partnership with Red Rock Resort for building its brand locally. Herrmann declined to discuss the financial terms of his company's lease with Red Rock Resort.

Herrmann said Yard House plans to work with another casino company when it opens a location next year near in the Linq retail and entertainment center under construction behind the Flamingo and Imperial Palace. Linq is owned by Caesars Entertainment Corp.

"We have signed the lease," Herrmann said. "We wanted to be located on the Strip. It's about speaking to more of an out of town consumer."

Yard House, which has 39 restaurants in 13 states, was recently sold for $585 million to Darden Restaurants Inc.

Wharton said the challenge, whether the restaurant is run by the house or an outside operator, is gearing the mix of restaurants to local customers, similar to what consumers might find at a mall or in a neighborhood retail setting.

"People's tastes have evolved," Wharton said. "Cheesecake Factory and those brands definitely changed the marketplace for the guest. The locals market is a repeat market. It's not the 95 percent to 98 percent transient consumer like the Strip."


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Chris Sieroty
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