Off to slow start, French Lick fears threat from 'racinos'

February 26, 2007

The owners of French Lick Resorts & Casino always expected a narrow profit margin. So there's no sign of panic yet over indications the place already is struggling, less than four months after its launch.

But the threat of unexpected competition from Indiana's two horse tracks is something else entirely. The casino's owners are downright terrified legislators soon will allow both tracks to become "racinos" and add up to 5,000 slot machines.

One-armed bandits at Hoosier Park in Anderson and Indiana Downs in Shelbyville could attract a significant share of French Lick's clientele--possibly enough to break its bottom line.

"We are such a low-margin business, trying to support the resorts with a very small casino in a remote location," said Mark Bommarito, vice president of sales and marketing for French Lick Resorts & Casino. "It doesn't matter if it's 100 machines or 2,500 machines [at each track]. Anything's going to have some impact."

In its 1920s heyday, French Lick was a magnet for tourists across the Midwest. But when cars replaced trains, highways to the rural region never followed suit. For decades, the palatial French Lick Springs and nearby West Baden Springs hotels quietly deteriorated. Both are historic landmarks.

Economic developers hope a $382 million restoration project and the state's 11th casino license will return the hotels--and the area's economy--to their former glory. But their luck may have soured. On Feb. 15, legislation that would allow slots at the tracks cleared a House committee 9-3. The measure now advances to the full House.

Legislators this year are looking for money to fund a slate of expensive new programs--including full-day kindergarten. Many see racetrack slots as a palatable way to raise millions of dollars in new tax revenue.

On the day of the vote, Orange County residents clad in orange shirts gathered at the Statehouse to argue against the bill. The casino earlier had organized a town meeting to rally concern.

They may have good reason to fret. Since French Lick Resorts & Casino opened in late October, it has become the region's largest employer, with 1,560 workers. And when renovations on the West Baden Hotel are complete in a few months, it will hire even more.

The next-largest local business is woodworking firm Paoli Inc., whose 750 employees face increasingly stiff overseas competition. Thanks to the casino, Orange County's unemployment rate has fallen to 6.4 percent. That's a full percentage point below its rate a year ago--but still well above Indiana's 4.7-percent average.

French Lick Resorts & Casino is co-owned by Indianapolis-based Lauth Property Group and a group affiliated with Bloomington billionaire Bill Cook, the founder of medical-device maker Cook Group. Cook Group Chairman Steve Ferguson said he already sees signs the project is having a positive effect on the area: A new movie theater is under development. Restaurants have cropped up. There's talk of a water theme park for family entertainment.

Give it time, Ferguson said, and French Lick can still thrive. But racino rivals to the north won't help.

"I've always thought, being a destination resort, it would be slow and steady growth, and it would take four or five years to build up clientele," he said.

"Right now, about 25 percent of our revenue comes from those areas that will be serviced by those tracks. If it were five years from now, I don't think it would have an impact, because we'd be a destination resort and we'd be established. Right now ... obviously if we took a 25-percent hit, it would be major."

Rocky start

In November, its first full month of operation, French Lick Resorts & Casino attracted 156,263 admissions and booked revenue of $9.4 million, according to reports filed with the Indiana Gaming Commission.

Attendance decreased the next two months. In January, admissions had dropped 35,740 from November and the casino's revenue was off by about $1 million.

Even so, French Lick is on track to surpass the 1.4 million in first-year admissions that casino's backers had projected when they applied for the casino license in 2005.

"The trick, obviously, is to keep people coming," said Judy Gray, executive director of the Orange County Economic Development Partnership.

But French Lick Resorts & Casino is not on course to reach the first-year revenue of $115.8 million it had forecast in the application. Based on the average for the first three months, revenue is on pace to reach $103.3 million in the first year.

Ferguson isn't yet alarmed about the discrepancy.

"Projections are projections. They're informed guesses," he said. "We're now operating on [real] information, so we can adjust what we're doing."

Perhaps the most significant problem: Patrons aren't staying as long as anticipated. At most casinos, peak gambling occurs during the late evening and early morning. At French Lick, Bommarito said, many weekend visitors leave by 10 p.m. On weekdays, they're gone by 8 p.m. He blames the area's lack of highways.

"That has been our biggest limiting factor. People do not want to drive those roads, especially at night. No one predicted the level our business would drop off in the evening hours," Bommarito said. "Anywhere from 20 to 40 percent of anticipated gaming revenues we haven't seen because people leave so early to get home."

Meanwhile, operating costs have been higher than expected. Those 1,560 jobs are great for Orange County. But each one adds expense.

"The biggest area where we're struggling is, the business model is much more labor-intensive than anyone had anticipated," Bommarito said. "Because the size of the resort is so large, just traveling and taking linens from point A to B takes anywhere from five to 10 minutes and requires more bodies than anyone anticipated."

The goal of the casino's owners is to make French Lick Resorts & Casino a "destination" where visitors will stay overnight or longer--and they still believe the masses will come.

They point to work in progress on three championship golf courses. They also argue the mineral springwater baths available now are at a fully renovated spa. They look forward to increased business in the spring and summer, when gardens will be in bloom and the scenic area's outdoor activities are available.

And, of course, hopes are still high that the beauty of the restored historic hotels will draw tourists.

"These are true, true gems in the state of Indiana. I can see why the people who understood what they meant to the history of the state wanted to save them. They're phenomenal," Bommarito said.

"Despite our limiting factors, we have still done very well. We're learning more every day as we operate about how to be more sufficient to work in this environment."

Financial experts aren't so sure. In a blunt Jan. 4 report analyzing the risk that French Lick Resorts & Casino would default on its mortgage notes, Greenwich, Conn.-based Libertas Partners predicts an imminent cash crunch.

"There is very little cash cushion imbedded in the current operating model, likely requiring liquidity enhancements in the months ahead," the report read. "Anything short of flawless operating results 'out of the box' will likely result in a liquidity squeeze in [the] second half of 2007."

The report goes on to detail the intense competition French Lick already faces from Indiana's other 10 casinos. All are closer to large urban centers, and many charge less for hotel rooms. It calls French Lick "overstaffed." It doesn't even consider the possibility of competition from racinos.

"Unfortunately, the current business plan remains underfunded to deal with several months, or even quarters, of disappointing results which we expect could occur as early as the February through May period of 2007," the report concludes.

"We take solace in the deep pockets of the Cook family, but would prefer to see the liquidity available on the balance sheet today."

Slots at the track

Michael Brown has a different tale of woe. The executive director of the Indiana Horse Racing and Breeding Coalition says his industry badly needs slots at the tracks to remain viable. It's in decline, he said, as owners flock to states with stronger tracks.

He said it's an industry well worth saving. Horse owners in all 92 Indiana counties have an annual $294 million economic impact, Brown said, and are responsible for 4,400 jobs.

"When you think about it, every horse operation that leaves the state is like losing a small factory. They have economic inputs and outputs. They generate employment," Brown said. "And when they leave, they don't come back, at least not without adding slots at our tracks."

The Indiana Gaming Commission has asked both the Casino Association of Indiana and the horse-racing industry to estimate the impact slots at the tracks would have on existing casinos.

To no surprise, their calculations differ substantially. Casinos in southern Indiana project up to a 20-percent loss of revenue. The horse-racing industry projects losses closer to 12 percent for the same casinos.

The estimates don't include French Lick. But because it is the casino nearest the tracks, it might be vulnerable to the biggest hit.

Purdue economics Professsor Larry DeBoer put it succinctly.

"Anytime a big, new competitor shows up between you and your market, you've got to be concerned," he said.

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