Two central Indiana racinos debut amid tough economy

June 2, 2008

The next few weeks will be critical for the state's two new racinos, which need to open with a splash to meet their ambitious projections of drawing more than 3 million visitors apiece annually.

Hoosier Park in Anderson will open June 2, and Indiana Downs in Shelbyville will follow a week later.

"Reputations can be made or broken based on an initial opening," said Craig Parmelee, a managing director of New York-based Standard & Poor's, who has analyzed the business plans of both.

The stakes are huge, and not just for the racinos themselves. The cities of Shelbyville and Anderson both are expecting windfalls from the new gambling venues, each of which has hired hundreds of people and expects to contribute $7 million to $10 million in annual taxes back to their local communities.

State leaders also are anticipating a big boost to their coffers. In addition to each paying a hefty one-time fee of $250 million for slots licenses, Hoosier Park and Indiana Downs collectively are expected to pay an additional $150 million in annual state taxes.

The General Assembly authorized slots for the two horse tracks last spring, in part to raise money for property tax relief and prop up the state's ailing horse-racing industry. Both Hoosier Park and Indiana Downs have struggled since head-to-head competition began in 2001.

Huge opening crowds are expected to check out the thousands of slot machines at each racino. But the number of repeat patrons they will attract is an open question.

Indiana's 11 existing casinos each lured an average of 2.5 million visitors last year. Only five casinos drew 3 million people or more, led by Hammond's Horseshoe Casino, which saw 4.1 million. French Lick Casino and Resort was the worst performer, with just more than 1 million admissions.

All those casinos offer table games, which the racinos are not allowed to provide. However, they can offer electronic, "virtual" versions of those games, a potentially powerful draw for gamblers seeking more than slots.

But the strongest asset for the racinos is their location in central Indiana, home to 1.6 million adults. Both Hoosier Park and Indiana Downs have built their business plans on repeat patronage from locals. Hoosier Park is about 40 miles northeast of downtown Indianapolis; Indiana Downs is about 32 miles southeast of downtown.

Neither business plan is a sure bet.

Last fall, S&P assigned credit ratings of "B," the sixth-highest grade, to each casino's debt. Such debt has "significant speculative characteristics," according to S&P's published definitions, with the potential for strengths to be "outweighed by large uncertainties or major exposures to adverse conditions."

S&P notes that both racinos have substantial leverage because of the license fee and spending tens of millions of dollars on construction. The sour national economy also is a negative. And it's impossible to predict whether the high cost of gasoline will help or hurt their prospects, as Hoosiers increasingly stay close to home.

On the other hand, the two racinos will fill a gambling niche that's long been underserved in Indianapolis.

Repeat visitors

Both venues are betting that a top-notch experience will help breed loyal patrons.

"Our goal is absolute, unparalleled quality levels of product and service," said Hoosier Park General Manager of Gaming Jim Brown. "That's where our business plan starts."

Hoosier Park is owned by Indianapolis-based Centaur Inc., a veteran of the casino business. It also owns Fortune Valley Hotel and Casino in Central City, Colo., and is developing Valley View Downs, a horse track and slots casino northwest of Pittsburgh.

South Bend-based Oliver Racing LLC owns Indiana Downs, its only gambling business.

Each racino has plenty to tout, including frequent fireworks, concerts and player rewards clubs. Hoosier Park promises nine dining options, including a steakhouse, a deli and a high-end buffet. Indiana Downs is planning a restaurant catered by Wolfgang Puck.

But neither will have all its planned amenities available immediately. Hoosier Park lists six of its bars and restaurants as "coming soon." Indiana Downs will debut with its slots housed beneath temporary tent structures. Doors to its permanent casino won't open until January.

Both racinos are trying to stoke a frenzy of interest through aggressive advertising. Both have rolled out television and radio spots, newspaper ads, direct mail and billboards.

"It's all designed to [make visitors] go, 'Wow, that's fun. I want to go back there again.' That's what we're shooting for," said Indiana Downs General Manager Mark Hemmerle. "As we've been saying in our ads, it's like bringing a little bit of Las Vegas here to Indiana."

Parmelee was skeptical of the comparison to Las Vegas, which is known for its lavish venues.

"The term 'luxurious' might not be exactly on target," he said. "That's not to say they're not going to create something that makes sense in the market for the target customer. But this is not going to be something that stands out when you consider gaming facilities around the country."

Hoosier Park initially will be most attractive to north-side residents, while Indiana Downs will draw the south-side crowd. But over time, residents will try both, and will learn quickly which offers the best food, highest rewards and most fun, said Larry DeBoer, an economist at Purdue University.

"Two nearly identical businesses serving the same market would be in competition with one another," DeBoer said. "That's got to be good for the consumer."

A growing market?

A key question is whether the racinos will create new gamblers, or simply attract patrons away from the riverboats.

Hoosier Park and Indiana Downs are betting there's room for growth in the state's gambling market, which has been relatively stable in recent years. But some observers speculate the market is mature.

"If there's ever been a case when a new casino or two in Indiana might have an affect on the other casinos, this might be it," DeBoer said.

S&P's Parmelee said French Lick Resort Casino is particularly vulnerable to losing customers. The 2-year-old casino is closer to Indianapolis than the riverboats along the state's north and south borders, and it's had the least time to establish its footing.

Though gambling is usually relatively unaffected by economic downturns, this year is proving an exception nationally. As a result, Parmelee said, this is far from an ideal time to try to expand the state's casino market.

"This is a challenging economy. We don't expect gaming markets to grow meaningfully this year" across the nation, he said. "In fact, we expect them to decline."

Even if the slots operations succeed, some observers question whether the racinos will remain committed to horse racing.

Most U.S. horse tracks have continued to struggle even after the addition of slots, and are a drag on the operation, said Bill Eadington, director of the University of Nevada Reno's Institute for the Study of Gambling and Commercial Gaming.

Eadington said that's because there's not much crossover between gamblers who like to bet on horses and those who enjoy slots. Horse-racing enthusiasts, he said, tend to be analytical and to seek out any information they think will help them make a successful bet. Slots attract gamblers more interested in luck, chance and random thrills.

"You've got a funny dynamic to the whole thing," he said. "Racinos are a back-door way to creating casinos, rather than saving racing. It's hard to find an example where racing has really been brought back."

In some cases, Eadington said, racinos quietly phase out their unprofitable horse tracks over time, despite previous pledges to remain committed to racing.

"They would say that, wouldn't they?" he said. "They're obviously not going to say, 'We're going to shut the track down.'"

'Tire kickers'

The long-term prospects of the racinos should be clearer by late summer. Plenty of "tire kickers" will check out the racinos right away, said Ed Feigenbaum, publisher of the Indiana Gaming Insight newsletter. He said figures for August and beyond will show whether the racinos are sustaining interest.

Feigenbaum said he's especially interested in the results for virtual table games, which simulate group gambling like roulette, poker or blackjack.

Traditional slots make up about four-fifths of most casinos' gambling revenue. Out of its 2,000 authorized gambling machines, Hoosier Park will offer 66 multi-player electronic table games. Indiana Downs promises a similar mix. If gamblers are comfortable with the virtual table games, they'll have even less reason to return to the riverboats.

Hoosier Park and Indiana Downs each holds another secret weapon: experienced management. Feigenbaum pointed out that both Brown and Hemmerle have had long, successful careers managing other casinos. Their industry knowledge will help them prevent the kinds of service mistakes--such as slow delivery of cocktails or long lines at higher-stakes slots machines--that leave a bad taste in a customer's mouth.

"It speaks volumes about the fact that these two companies know what they're doing, and getting into, and have high hopes for these two properties," Feigenbaum said. "And it should make the Gaming Commission and Hoosiers feel good about what to expect."

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