Q&A: Kevin Kelley, executive vice president and COO, Station Casinos

By Richard N. Velotta

Friday, Jan. 1, 2010 | 3 a.m.

Kevin Kelley’s 30-year gaming industry career has spanned nearly every aspect of casino operations from valet attendant to chief operating officer, with three companies on two continents.

But despite that vast array of experience, nothing could have prepared him for the challenge of operating one of the nation’s largest casino companies while in bankruptcy.

Kelley, chief operating officer and executive vice president of Station Casinos, is on his second tour with the company, first joining it in 1993 when he climbed to the president of the company’s westside operations, overseeing five properties.

The UNLV hotel school attendee then went to the Hard Rock in Las Vegas in 2004 and Las Vegas Sands in 2007, where he was the senior vice president of its Macau operations.

He returned to Station in January 2008 and runs the day-to-day operations for the locals giant. Kelley discussed the challenges of marketing a casino company operating under Chapter 11 protection with In Business Las Vegas:

IBLV: Station Casinos revenue was down 19.3 percent in the third quarter year over year. What has been the trend in the fourth quarter?

Kelley: On a year-over-year basis, we’re going to be down again. But with the fourth quarter, we are going to see better results than the third on a sequential basis. The good news is that there’s been pretty good, robust sports business. Typically during football season, you see an uplift, and everybody has a little more time on their hands in those particular three months than in the third-quarter months. We’re fortunate to see that there is, on a sequential basis, some improvement,

When does the company project a turnaround and a sustained period of rising revenue?

We’ve been trying to predict that now for the past two years. It seems like since I’ve been back in the company that’s all we do, try to figure out when the bottom is going to be. Through it all, we’ve become a little more adept at looking at some of the most important macroeconomic metrics in the valley and using those as a benchmark for when we might start to see some improvement. And I can tell you that we’ve gotten a lot closer to some of the economists who prognosticate in the valley. In all candor, it looks like 2010 is going to be a pretty tough year, and we’re going to be seeing a lot of challenges that we’ve had in 2009 continue. We’re preparing ourselves for that — preparing for the worst and hoping for the best.

Obviously unemployment and foreclosures locally hit record levels, affecting your results. Were there other economic factors that affected Station?

Clearly disposable income ties in to employment and consumers’ ability to tap into the equities of their homes. In 2005, 2006 and 2007, people used their homes like ATMs. It created this bubble in the economy that created a steeper trajectory of growth rates that we thought were going to live on forever. Now, that doesn’t exist any longer. I think we’re back in a situation that once we get through this thing, we’re going to see a more normalized rate of growth commensurate to the ’80s and ’90s. We’ve become very focused on the unemployment rate, housing values and retail sales. When you look at the downturn in retail sales across the valley — the numbers I’ve seen showed that May was the highest. It was down 21 percent on a year-over-year basis, those were alarming numbers. A lot of that has a relationship with our business. The way retail sales behave is a little bit about the way local gaming revenues behave.

Is business down the same across the board or have certain parts of town and certain properties been hurt worse than others?

I think the whole valley has been impacted to a degree. There are properties in different neighborhoods that, on a year-over-year basis, have performed better than their sisters. There been a couple of areas in the valley where new competition has encroached. More gaming positions in a shrinking market makes for a challenging scenario for our properties. That’s had an impact on our business as well.

What about the general trend of reduced visitation to Las Vegas? Did that hurt some of your destination properties such as Red Rock and Green Valley Ranch? How has your business mix of visitors and locals changed with the recession?

We’re impacted in a couple of ways. In the time since Mr. (Frank) Fertitta started the Palace Station, we have relied on locals as the backbone of our business. And the majority of those folks were people who worked in the hospitality industry. We relied on a healthy tip income, year-over-year wage increases and so forth and we benefited greatly from that. With the lack of visitation to Vegas and spend-per-visit being down, unfortunately those folks have been significantly impacted.

Those who still have jobs are working shorter schedules, because the average spend of those tourists is down, they’re not making the robust tip incomes that they once were. The Culinary Union has frozen wage rates for this year. All those things equate to discretionary income that people used to have in their pockets that they don’t have any longer. Obviously, that has an impact across the whole city and on our business.

Then when you think about Red Rock and Green Valley Ranch, we’re out there fighting for high-end group business and good high-end (free and independent traveler) business, which is challenged across the whole market so we find ourselves competing with people like the Four Seasons, the Wynn products and the Bellagio and those kind of properties that cater to the segment of the market as well. Again, we’re finding ourselves impacted by those things.

But the one good thing in terms of Red Rock and Green Valley Ranch is that because we have more boutique style properties in that particular market segment, we don’t have to worry about filling 4,000 rooms a night. We can still maintain a little more pricing integrity at those properties and we have. When you compare some of the luxury rates on the Strip on a year-over-year basis, we’ve been able to punch above our weight decent enough to where we can be proud that we’re holding our own.

You referenced that besides fewer people visiting hotels and casinos, those visiting are spending less. How much has the spend per visitor declined for Station? What are you doing to boost this number?

There’s good and bad news for us on this. We’ve pretty much been able to maintain visitation from a year-over-year standpoint when you look at how many visits per property, per month we’re getting from people who come and play here and we use our database as the benchmark and the barometer. We’re seeing visits flat to, in some cases, like November, where we’ve seen visitation up in low single digits (percent). But in terms of average daily spend, it’s very, very challenging. There’s just so much juice in that orange. We’re focusing a lot of our marketing efforts on very value-driven propositions. That’s the most important thing in the hearts and minds of consumers.

Consumers don’t want to stay home, I don’t think, because the numbers show that they want to be in our buildings. But they’re really value conscious. So we’ve done a lot of things to ensure that our guests know that there’s great value here. All summer long, we had two-for-one buffets. That was a very popular program. In November, we launched our Jumbo Cash Wheel bonuses where video wheel and reel slot players receive cash bonuses, about 6,000 additional bonuses per day. Those are things that we want to give people a great entertainment experience.

In addition to that, we’re really focused on the guest experience and making sure that we always have the right amount of staff in the right place at the right time. We’re really careful about watching our schedules and things like that and trying not to be wasteful, but we’re also very passionate about making sure that when there are customers in our house that we have the right amount of staff to service them. And at the same time, they’re focused on delivering a great guest experience. What we really focus on here is that we know the tough times will subside.

How much has new competition been a part of the equation? In the past year and a half, the M Resort and Eastside Cannery have opened. Did that hurt your results?

When you look at the Cannery, for example, we’ve been very fortunate on the Boulder Highway to have a product that has the best location on the Boulder strip — we’re right next to the freeway — and we’ve got an amazing facility relative to everybody else’s from a convenience, in-and-out standpoint and from a product-offering standpoint. So we really haven’t seen the Cannery make as significant an impact on our business at Boulder Station. I think the economy has been harder on Boulder Station than the impact of the Cannery.

On the other hand, out in Green Valley with the opening of M, it’s a very challenged market from an economic standpoint, hit very hard with foreclosures and those sorts of things. Having more gaming positions in that market, and we had the majority of the properties in that market, we were going to see some dilution there — and we have. On balance, when you look at how Sunset Station and Green Valley Ranch have held up in the face of a billion-dollar property opening up, I think we’re doing pretty well. I’m proud of the teams over there. They’ve done a lot to ensure that team members are focused and to make sure that the value proposition that we think is so important lives every day. But the fact of the matter is the M is going to be maybe more convenient to some people who used to be tried-and-true Green Valley and Sunset customers and in the locals market, convenience wins. At the end of the day, convenience is the No. 1 factor for why people choose the properties they choose.

Have you seen or do you anticipate any effect from CityCenter? Construction workers went away, but now 12,000 hotel and casino workers have jobs. What does this mean for Station?

The construction business was a big, big part of our customer base for a long time, forever, here in Las Vegas. Obviously, we’ve seen a significant erosion of that business beginning in 2007, all the way through the last couple of years. I think a lot of that stuff has washed out. It’s unfortunate that those 12,000 jobs are going to go away in the market when we need every single job that we can have. Those guys were fairly high earners and typically had a fairly significant amount of discretionary income. But we also know that the team members that are going to work at CityCenter will make a pretty healthy paycheck as well and at the same time, they have a stable job. Those are jobs that will last for a long time. I think overall it should be beneficial to the community to have 12,000 hospitality jobs starting up right now.

Station is in bankruptcy and Boyd Gaming keeps offering to buy it. Is that hurting business because customers are fearful that a casino may close or you can’t pay jackpots, are tightening slot machines or raising food and beverage and entertainment prices?

In those sorts of situations, customers typically vote with their feet. What we have seen since we filed for Chapter 11 to reorganize and Boyd has gotten involved and thrown its hat in the ring, we’ve actually seen our head counts grow. I think a lot of that is about the great work that all of our team members do to provide that guest experience that we were talking about. But clearly there are always distractions, just like what we saw in yesterday’s newspapers (stories on Boyd increasing its offer to acquire Station).

But I think as a company we have a commitment to our team members to keep them in the loop and have them understand exactly what’s going on. I think they’re probably better educated than most people are when they pick up the paper and read the headlines. We made a commitment to our team members that any sort of newsworthy information relative to our restructuring, they were going to hear it first before they read it in the newspaper. So we’ve been very committed to anytime something like this happens to getting out the information the right way, getting the message that is correct and proper so they can understand it, digest it, know that it either impacts them or it doesn’t and they can get on with business.

I know that there have been other companies in town that have gone through similar situations, and they haven’t talked to their team members once through the whole thing. I think that’s a big mistake. The worst thing that can happen is not knowing because then you start to speculate and people always have the tendency to think the worst. Through this process, I think we’ve done a really good job of letting people what’s going on in real time and at the same time always drawing back to what’s most important. What’s most important is that we stay focused on doing our jobs, treating our guests, providing the great guest experience that we’ve been providing for the past 20 years, and it’s been working for us.

So is the bankruptcy a distraction?

We don’t shy away from the bankruptcy. It’s a reality. Every day, I come here and I focus on what I do. My responsibility as COO is to run the business. Whether there’s a reorganization or there’s not a reorganization, I’ve got to run the business, and we’ve got to do the best job that we can possibly do in these challenging times. What we’ve kind of done, Frank (Fertitta III), our CEO, and myself, is divide and conquer. Frank and our attorneys and our financial advisers work on this stuff all day, every day. And I work on operations. That’s what I do. Thankfully, I think it’s worked well for us. We’re seeing good things in our business in terms of our visitation. We’re really proud of our team members who have really had to tighten their belts and they’ve made great sacrifices. We’re really looking forward to getting through this thing.

How’s the morale?

It’s interesting, we do an all-team-member survey twice a year and we have seen improvement in those survey scores for the last two surveys that we’ve had. We had one in March and we had one in late fall. I think what they really appreciate is the amount of communication that we have been sharing with them, keeping them up to speed and making them feel as though they’re valued, which they are. I think when you really tell people what’s going on, they appreciate that. That’s been very helpful.

How do you communicate with your employees about things?

We have a number of different channels. We have what we call “huddles” every single day, which means that every department, every shift, before they go on the floor, they are met with by their supervisors who have a message to share with them. It might be service issues, it might be promotional things that we have going in the property on that day. Or it might be a message from me, or a message from our chairman. The expectation is that these messages are shared every single day. So that’s one way of getting the news out very quickly, through the huddle process. Our corporate human resources department formulates what we call the “huddle sheet” and it takes all the salient issues of the day and stamps it out across all of our properties so there’s always that consistent element across all 18 of our properties.

You are doing record marketing. Is that in response to the news about the bankruptcy or is it more generally a response to the recession and the need to keep people walking through your doors?

It clearly has nothing to do with the restructuring. It has everything to do with creating a value proposition to keep people coming through the door.

Your newest advertising campaign could be described as “folksy,” showing on some of your customers and their experiences. What’s the strategy on these ads?

It’s always been a cornerstone of our business to have our team members and our guests be a part of our overall marketing campaign. I think there’s nothing better than third-party validation. So if you can have a real guest who’s hit a real jackpot at Station Casinos and who wants to espouse the virtues of playing at Station Casinos, let’s use that to our benefit. That’s always been an important part of what we do here, getting everybody involved.

Isn’t there a danger of viewers asking, “Why are these people gambling during a recession?”

That’s the business that we’re in. At the end of the day, especially in Las Vegas, people see coming to a Station Casino as a way of entertainment. It’s not just gaming here, either. It’s about coming to the movies and bowling and eating at our restaurants and enjoying some of our entertainment offerings and that kind of thing.

Have you actually lowered prices to induce more people to visit your casinos? Are food and beverage and entertainment prices down and have the slot payouts been adjusted to give the players a better value?

We’ve done a lot of things with two-for-one buffets, two-for-one happy hours in all of our bars. We’ve done that Jumbo Cash Wheel bonus, money that we just give away essentially on a daily basis — 6,200 jackpots a day in addition to what people would normally win. So that’s all a part of our overall marketing efforts. Giving people value for money right now is the most important thing. All of our prices have to be approachable and digestible. You’ve got to give people time on the device so they feel they’ve at least gotten their money’s worth. Coupled with that you have to have team members who are committed to giving people great service and making them feel good and thanking them for their business.

Is there a danger in lowering prices, including hotel room prices (to attract business)? Does the Station brand suffer, especially at your high-end Red Rock and Green Valley Ranch properties, if you discount dramatically?

That’s a really great observation. We have been, at this point in time, really testing the floor and trying to establish proper bench marks for each one of our brands. We have a luxury brand, we have our Stations brand and then we have the more modest Fiesta brand. Across every single one of those brands, we have to figure out where the bottom is in terms of our pricing and making sure that we don’t go below that. I agree, there’s a certain point across every one of those brands that if you just go below that, it’s a detriment to that business.

Is there a formula that you have to reach those numbers?

It’s a very tough tightrope. We’re always concerned about making sure our hotel rooms full and using that as a revenue driver for ourselves. Where is that sensitive balance when all of a sudden you give too cheap a price away in your hotel room and you’re really not gaining anything in the casino because of it? So we’re constantly analyzing it, constantly monitoring it and we’re playing with it, fine-tuning it to try and find that sweet spot.

What exactly are some of the offers you’ve made and how do they compare in terms of value to the consumer to what you offered a few years ago during the strong economy?

We were certainly less aggressive on two-for-ones, for example, in terms of offering them on a frequent basis. In years past, there would be times in low business points where we might go out and do a two-for-one. But we knew the summer was going to be tough. So we said, “Let’s give people in the market a value, a reason for people to come to Station Casinos.” We made a commitment all summer long to keep that special going. We drove a huge amount of volume through our buffets. We haven’t raised buffet prices, I don’t think, in probably three years. So we kept pricing consistent. But by offering a 50 percent discount, it’s a significant value for people.

Will (the two-for-one buffet) come back?

We look at that, and we time it appropriately when we think that we need to. And it’s certainly something we’ve done in the past, and I’m certain it’s something will do again in the future. One of the other things we’ve done relative to the luxury brands, for the My Vacation package for locals, we’ve offered two nights at $250 with a $200 resort credit, which means they can take that $200 and spend it in our bars and restaurants and other entertainment venues. At the end of the day, if you want to fully enjoy all those resort credits, you’re getting the room for $25 a night at Red Rock and Green Valley Ranch. That’s a pretty significant value.

Are the cash giveaways a drain on resources, or do they induce enough business that they are profitable?

We believe in doing promotions. Long, long ago beginning with Mr. Fertitta at Palace Station and promotions like “Car a Day” and “Great Giveaway,” those were the ones that kind of set the benchmark for us in terms of the kinds of promotions we do. We feel that the promotions that we do are relevant. We see increased business when we do them. We think there’s some reasonable margin in them, and our guests seem to like them.

We all know that people have less money in their pockets. How does that change the marketing approach? How do you market differently, knowing that they have less money?

I think everybody’s got less income. We have a number of different marketing strategies that we deploy, whether it’s the broad-based media initiatives or whether it’s our direct-mail campaigns that are pretty much run through our Boarding Pass rewards program. We carefully look at those spends and we try to measure them carefully in terms of what we think they bring to the properties and try to make sure that we maintain good operating margins relative to those spends and to those campaigns that are among those particular segments. Again, it’s challenging because people are still coming, but they’re coming with a little bit less. Making sure that we are responsible in terms of right-sizing our offers is what we do a lot of. Our marketing team does a lot of work in terms of making sure that people are getting proper value for their play.

Are you doing more with direct mail and your database? Or is more of the budget going to mass media — television, radio, newspapers and billboards?

When you break it down as a percentage, it’s pretty much evenly matched. We have what we call our rewards program and then we have our promotional and advertising programs and they’re about 50-50 in terms of the dollars that we spend.

What are you doing with social media like Twitter and Facebook? Is there much of a future there for Station?

Yeah, we’re just breaking into that. I actually sent my first blog the other day. It’s really cool. My son is very technologically advanced — he actually has his own company. He just graduated from college and he started his own Internet company. So he’s very up to speed on Facebook and MySpace and Twitter and all that stuff. You see what’s going on around you and you say, “Heck, you’ve got to be a part of this thing.” So w We brought some young people into the company who really understand it. And the charge is, “Let’s jump into this thing with both feet and get committed to it and see how it works.” And we’re really seeing some great results.

I think the thing I can point to right now that’s so cool is my blog. It was a very introductory blog, but I got a lot of great comments, and it wasn’t just, “Oh, it’s wonderful to see you’re blogging” and “Congratulations” and so forth. We actually had some guests who had a lot to say, and it wasn’t all pretty. There was, “You need to have better cocktail service at Sunset Station” and “We think that your slots are too tight.”

But everybody thinks that slots are too tight.

But you know what? I like to hear this in real time because it creates a sense of urgency in me to deal with these issues. If somebody is upset enough or passionate enough to get on the blog and talk to me right then and there, you know what? That’s an opportunity for us to help improve our business. So I think it’s really a cool way of, in real time, understanding what the tone of your business is, what the tone of your guests are. It gives you something to really be able to react to.