Sunday, July 12, 2009 | 2 a.m.
More than two years ago, executives at Harrah’s Entertainment made a momentous decision: They wouldn’t tear down any of their Las Vegas casinos to build new ones.
They didn’t announce their intentions at the time. The economy was still humming, and with tourism booming and new resort construction expected by consumers and demanded by investors, the decision was something of a dirty secret.
Their plan was nothing less than a rejection of the implosion-punctuated business model that has defined Las Vegas for decades. In place of a new casino resort, Harrah’s came up with an idea that was more Bourbon Street than Las Vegas Boulevard.
Internally dubbed “Project Link,” the plan calls for a collection of about 20 restaurants and bars to be built along a winding corridor between the company’s O’Sheas and Flamingo casinos, on the east side of the Strip.
With a mix of “eclectic” and “mostly casual” restaurants and bars opening to the street, it’s an attempt to create the kind of entertainment district that has developed organically in cities such as Los Angeles, Memphis and New Orleans yet is lacking on the Strip, with its enclosed, casino-centric zones.
The company declined to discuss the project’s cost.
To fine-tune the idea, Greg Miller, Harrah’s senior vice president of resort development, spent months studying pedestrian environments across the country, analyzing Strip traffic patterns and surveying customers.
“Another casino didn’t make a lot of sense,” said Miller, who developed theme parks for Universal Studios before joining Harrah’s five years ago. “It’s tough to make that math work.”
The Project Link strategy is perhaps fitting for a company that’s known more for the marketing prowess of its techno-geeks than its resort building. It also appears prescient in this era of fiscal conservatism, with investors soured on the Strip’s building boom.
Construction costs are high in Las Vegas, home of some of the world’s largest and most complex structures. Harrah’s executives, who assembled thousands of designs for future Las Vegas resorts before settling on Project Link, recognized that those costs could support only a high-end casino resort, which can command higher profit margins from marked-up amenities than a mid-market or low-budget hotel. Opening a new Harrah’s resort would have potentially cannibalized business from Caesars Palace, the company’s flagship.
With a finite number of wealthy Las Vegas visitors, and competition from luxury resorts open or under construction, returns on high-end resorts aren’t what they once were. Tearing down money-making properties to build resorts that would likely generate a poor return didn’t make economic sense — then, now and for the foreseeable future, Harrah’s executives concluded.
Project Link would allow the company’s money-making casinos on each side to continue operating as it builds the pedestrian corridor of multi-story, tenant-occupied buildings stretching back at least a block to the monorail line behind the properties.
At the end of the 1,000-foot pedestrian walkway, Harrah’s wants to build a giant Ferris wheel similar to the London Eye and the Singapore Flyer. The wheel would tower about 600 feet, offering sweeping views, plush interiors and a slow ride.
Analysts said the concept makes sense — especially for a heavily indebted company that does not have experience building major resorts and caters primarily to middle-income Americans.
“The idea of building big resorts is dead — for now,” said Dennis Forst, a stock analyst with KeyBanc Capital Markets.
“Investors want to know how they’re going to pay down debt and shore up their balance sheet. They don’t want to hear about spending a billion dollars on a new venture,” he said, given the financial troubles of Strip resorts now under construction.
Jeff Voyles, an associate professor of casino management at UNLV and a partner with Globalysis, a gaming consulting company, said Las Vegas has long needed a Strip-fronting dining district like the one Harrah’s is proposing, but gaming companies have been reluctant to invest in untried concepts.
“This is a copycat industry. It took the Forum Shops for others to build malls and Sheldon Adelson for others to build major convention space,” Voyles said. “The whole concept of Vegas, for a long time, was to drive people into the casino.
“There’s a tremendous amount of foot traffic in front of the Harrah’s properties. This is just like getting people to stay longer at your blackjack game — if you can get people to stay a little longer in your bars, you get them to buy a couple more drinks.”
The project is contingent on the company obtaining new financing — a near impossibility today considering Harrah’s recession-ravaged balance sheet.
Struggling under more than $20 billion in debt taken on when private equity firms Apollo Management and Texas Pacific Group acquired Harrah’s in January 2008, the company has urged bondholders to swap their notes for new ones worth less money and with extended maturity dates, buying the company more time to survive the recession.
It may be a couple of years before Harrah’s can finance even a relatively inexpensive project — unless the company finds equity partners, said Dennis Farrell, a bond analyst with Wells Fargo Securities.
Even so, the attempt to capture pedestrian traffic that might otherwise walk on by is a wise move in light of this year’s arrival of MGM Mirage’s CityCenter, which is expected to take business from other properties and may create a new focal point for the Strip, he said.
The company has delayed the opening of its Octavius tower at Caesars Palace, with more than 600 rooms, until the economy, and hotel demand, improves.
Harrah’s is still moving ahead with a previously planned expansion at Caesars Palace, including a 110,000 square-foot addition to its convention center, luxury pool-facing villas and an expanded Garden of the Gods pool area that will open this month and next.
Like Project Link, these add-ons are part of the strategy to enhance existing buildings rather than sacrifice profit by tearing them down.
Industry watchers widely speculated that Harrah’s growth and expansion plans would slow under private ownership.
After private equity firms acquired Harrah’s, the company maintained that bottom-line-oriented owners wouldn’t dictate the company’s development plans. Miller said the implosion-free strategy, along with plans for Project Link, were under way before Apollo and TPG entered the picture.
Miller’s development team, which meets weekly to hash out ideas and fine-tune designs, spent years on several designs that ended up on the scrap heap. Among their ideas were a high-tech resort featuring interactive video walls, handheld concierge devices and spaceship-like pods to transport guests between floors, and a megaresort anchored by an indoor-outdoor water park.
The whimsical designs, a departure from the sleek, themeless skyscrapers now taking shape on the Strip, excited Harrah’s executives but would not have made much money, they concluded after an exhaustive cost analysis.
Voyles, the casino management professor, said a future without implosions isn’t a bad thing for Las Vegas.
“In the past it was easier to do that because money was cheap and cash was flowing from other properties,” he said. “But Las Vegas can still create one-of-a-kind attractions without leveling things first.”