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Supply Chain Management of Harrah's Entertainment, Inc. -
January 8th, 2011
William Harrah parlayed a Reno bingo parlor into a company, Harrah's Entertainment, Inc., consisting of Nevada casinos, hotels, and nightclubs that brought in nearly $200 million a year before his death in 1978. Harrah's later opened a casino-hotel in Atlantic City and expanded rapidly in the 1990s, as casino gambling spread to half the nation's 50 states. In 1994 Harrah's Entertainment, Inc. had the largest share--nearly eight percent--in the nation's $14-billion-a-year casino-gambling industry, and in 1995 it was operating more casinos in more markets, 15 casinos in eight states, than any other casino company in North America. The casinos were located not only in traditional land-based venues but also on riverboats and Indian reservations. In 1996 the company opened its first overseas casino operation, a joint venture in Auckland, New Zealand. Harrah's was proceeding with expansion plans and projects in nine markets and was aiming at a goal of 30 casinos worldwide by 2000.
The Early Years
William Fisk Harrah was the son of a Venice, California lawyer and real estate operator who also had served as mayor of this seaside community. The senior Harrah went bankrupt during the Depression and was left with only one asset: a leased building on the honky-tonk Venice pier jutting into the Pacific Ocean. Here he operated a nickel-and-dime game of dubious legality, loosely based on bingo, in which players sat in a circle and rolled marbles toward a number. After Bill Harrah was caught cheating on a college chemistry exam in 1930 he went to work running the game and soon concluded he could do better than his father, who sold it to him for $500. He got rid of the shills his father had hired, refurbished the premises, and grossed as much as $50,000 a year.
In the wake of a state crackdown on gambling, Harrah moved in 1937 to Reno in Nevada, which had legalized gambling six years earlier. There he bought a bingo parlor that was located too far from the action and failed in three months. In 1939, however, he reopened in the two-block gambling heart of Reno. Three years later he opened a casino, equipping it with a blackjack and a craps table and 20 slot machines.
The enterprise flourished during the free-spending World War II years, and in 1946 Harrah's Club opened in quarters that had been expanded by the purchase of neighboring properties. Harrah added roulette to the card and dice tables and served liquor to the players. His spotlessly clean, glass-fronted, plush-carpeted casino was a contrast to the rough frontier-type betting parlors of the time and was the first to be lined with one-way mirrors so as to oversee the dealers and cashiers handling the chips and cash. By 1948 the gross annual revenue of Harrah's Club was more than $1.5 million and its net profit, after taxes, was about $100,000. This was just the start, for when Harrah swore off alcohol in 1952 (after almost losing his life driving while drunk), he turned his attention from hell-raising to a more highly focused passion for profit.
The Reno and Lake Tahoe Casino-Hotels, 1955-1970
In 1955 Harrah bought a dingy casino--housed in a quonset hut--on the southern shore of Lake Tahoe, just east of the California state line, for $500,000. He built a false front around it and reopened it as Harrah's Tahoe. Four years later he relocated the casino across the highway, in the world's largest single structure devoted to gambling. The new casino was a highly integrated operation that included a ten-acre parking lot and an 850-seat theater-restaurant stocked with star entertainers. Blizzards habitually buried the area each winter, but Harrah assembled a fleet of snowplows to clear the mountain roads, which were doubled in width at his own expense. Not averse to the low-budget trade, he established a vast bus network to bring in customers from 31 California cities and even opened a child-care center for gambling parents to park their offspring. The Lake Tahoe casino was said to have turned a profit of more than $1 million in its first year.
The annual gross from Harrah's two casinos was estimated at $40 million in 1961, and four years later William Harrah was described as the world's biggest gambling operator. With 2,500 employees, he was the largest employer in Nevada except for the Atomic Energy Commission. A lover of fast cars, he established Rolls Royce, Ferrari, and Jeep dealerships and assembled the world's largest automobile collection, which the Internal Revenue Service allowed him to write off as a business expense.
With both his casinos booming and no inclination to take on the competition in Las Vegas, Harrah next turned to the hotel business. He constructed the highest building in Reno, a 24-story hotel across the street from his casino. Completed in 1968, it cost about $7 million. Next he erected a luxurious 18-story hotel, which opened in 1973, on his Lake Tahoe property. Every room came with a view of the lake and two marble-finished bathrooms.
Public Company in the 1970s
In part to finance these ventures and support his lifestyle (he was married six times), Harrah took his company public in 1971, raising $4 million after taxes and expenses by offering 13 percent of the stock at $16 per share. No Wall Street firm would handle the offering, but it was oversubscribed, and within a year the stock had soared to $71 per share. Overcoming the financial sector's misgivings about the gambling industry, Harrah's became, in 1973, the first casino company listed on the New York Stock Exchange.
Harrah's net sales increased from $77.9 million in 1970 to $195.6 million in 1979, and net income grew from a low of $4.3 million in 1971 to a record $16.9 million in 1978. One securities analyst called Harrah's the most tightly controlled and best managed casino company in the world. Its two casinos, operating around the clock every day of the year, accounted for about 10 percent of Nevada's gambling volume. Games of chance now included baccarat, poker, and keno, as well as the roulette, blackjack, craps, and bingo tables and 3,733 slot machines. The 1,600 seats at the theater-restaurants in Reno and Lake Tahoe were almost always filled every night. The two hotels enjoyed a 92 percent occupancy rate. Nearly 250,000 customers came every year by bus, leading Harrah's president to acknowledge, "We are the Safeway of the industry."
By the late 1970s, however, Harrah's was beginning to encounter difficulties from the opening of competing hotel-casinos in Reno and environmental constraints on further development in the Lake Tahoe area. The company scrapped plans to open a new Reno hotel-casino just across the street from the existing one and a combination hotel-casino and theme park just outside the city. When Harrah died in 1978, he left his heirs almost six million shares of stock in his company, but no cash to pay estate taxes of $35 million or a $13 million debt to a Reno bank.
Holiday Inns Subsidiary in the 1980s
At this point a buyer for Harrah's emerged in the unlikely form of family-oriented Holiday Inns, Inc., a Memphis-based company previously run by pious Baptists opposed to gambling. Even before Harrah's death, however, Holiday Inns executive Michael Rose was seeking his participation in a joint venture in Atlantic City, New Jersey, where gambling had been legalized in 1977. The company bought, in 1979, a stake in a casino adjacent to the Holiday Inn on the Las Vegas Strip. It was renamed Holiday Casino and, later, Harrah's Las Vegas. Holiday Inns also announced plans to build two casino-hotels in Atlantic City. In February 1980 the company acquired Harrah's, which was still about 70 percent owned by William Harrah's estate, for $310 million in cash and notes. Rose, who became chief executive officer of Holiday Inns the next year, sold most of Harrah's 1,400 automobiles for $100 million and gave the rest to a Reno museum.
Now a wholly owned subsidiary of Holiday Inns, Harrah's became the operator of a casino opened in 1980 on marshland a mile and a half north of Atlantic City's boardwalk and named Harrah's Marina Hotel Casino. It had 506 guest rooms, a casino with capacity for 6,300 patrons, and an array of other spaces, including restaurants and bars, a Broadway-sized theater, conference and meeting rooms, a high-rise garage for 2,100 cars, and a "fun" center for children and teenagers. A 264-suite tower was added later. Harrah's Marina (later renamed Harrah's Atlantic City) proved to be the most consistently profitable casino in Atlantic City. In 1985, for example, the facility earned $48.8 million before taxes, by far the best performance of any of the 11 Atlantic City casinos.
In 1984, Harrah's opened, in partnership with real estate developer Donald J. Trump, the tallest building on the Atlantic City boardwalk, the 39-story Harrah's Trump Plaza hotel and casino. The joint venture, built by the Trump Organization on Trump land but with Harrah's money, collapsed in acrimony when the competing Trump's Castle made its debut the following year right across the street from Harrah's Marina. In 1986 Trump bought Harrah's half-share in Trump Plaza (Harrah's name had been removed) for $59.1 million.
Bill's Lake Tahoe Casino was opened by Harrah's in 1987 on a 2.1-acre site adjacent to Harrah's Lake Tahoe. The following year Harrah's Laughlin was opened in Laughlin, Nevada, on a natural cove on the Colorado River, with 464 hotel rooms and 26,500 square feet of casino space. Late in 1988 a second Laughlin hotel tower was completed.
Headlong Expansion in the 1990s
In 1989 Holiday Corp., formerly Holiday Inns, became The Promus Cos., Inc. The following year Rose sold the Holiday Inns hotel chain to Bass PLC of Great Britain for $2.23 billion. Holiday shares were then converted, on a one-for-one basis, to Promus shares, with Holiday's Embassy Suites, Hampton Inn, and Homewood Suites hotel divisions remaining as Promus units. Harrah's continued to thrive as the company's casino-entertainment division and in 1991 relocated its headquarters from Reno to Memphis.
Casino gambling had been legal only in Nevada and New Jersey until 1989, but between 1989 and 1996 it was legalized in some form in 21 additional states. In 1993 Harrah's established a new division for riverboat casinos and opened the first of these facilities along the Illinois River in Joliet, Illinois. A second Joliet floating casino opened the following year. Also during 1993-1995 Harrah's established riverboat casinos along the Mississippi River in Vicksburg and Tunica, Mississippi, the Red River at Shreveport, Louisiana, and along the Missouri River in North Kansas City, Missouri. A second Tunica riverboat opened in 1996.
Harrah's also continued to create land-based casinos in the 1990s. Eagle Gaming, L.P., one-sixth owned by Harrah's, opened casinos in the Colorado historic mining towns of Central City and Black Hawk in 1993. They were managed by Harrah's for a fee. In addition, in 1992 Harrah's announced the creation of a new division for casinos on Indian lands. Congress had, in 1988, passed a law legalizing games of chance on Indian reservations in any state where such games were allowed for churches, temples, and veterans' and other groups. By August 1993 no less than 73 tribes in 19 states were offering or would soon be offering full-scale casino gambling. Harrah's Ak-Chin, near Phoenix, opened in December 1994. A year later the Upper Skagit Indians and Harrah's opened a casino entertainment complex about 70 miles north of Seattle.
On February 1, 1996, Harrah's celebrated the grand opening of its first international casino entertainment complex, Sky City Casino in Auckland, New Zealand. This property consisted of 45,000 square feet of casino space and was also to include a hotel, theater, and 1,076-foot-high tower. The company, which held a 20 percent share in the joint venture, was to manage it for a fee.
An embarrassment for Harrah's was the failure of Harrah's Casino New Orleans, which was owned by Harrah's Jazz Co., a partnership in which a subsidiary of Harrah's Entertainment held a 47 percent interest. On the edge of the French Quarter, this temporary casino (a permanent one was under construction) opened in 1995 but closed in nine weeks, grossing less than half of its projected $33 million a month and causing the partnership to file for bankruptcy. Harrah's Entertainment wrote off $93.5 million of losses in the failed venture but was not responsible for Harrah's Jazz Co.'s $435 million junk bond debt.
In late 1995 Harrah's and Players International, Inc. broke ground on a joint riverboat casino entertainment complex in Maryland Heights, Missouri, a suburb of St. Louis. Each company was to operate two boats, connected by a shoreside entertainment mall anchored by a 291-room hotel managed by Harrah's. During 1995 Harrah's also announced plans for major expansions of its Las Vegas and Atlantic City casino properties, including the addition of a hotel tower and additional casino space. Construction of a $78 million expansion of Harrah's North Kansas City also began that year.
In 1995, the Promus Cos. divided into two separate corporations, with the casino division becoming Harrah's Entertainment, Inc. and the hotel division Promus Hotels Corp. Rose remained chairman of both companies. By the end of February 1996, Harrah's offered 16 casinos with 592,500 square feet of space, 16,377 slot machines, 898 table games, 63 restaurants, and 21,905 parking spaces. There were 5,736 hotel rooms at the end of 1995. Gaming volume came to $20.6 billion that year, compared to $8.5 billion in 1991. Harrah's long-term debt was $753.7 million in 1995.
The riverboat division was Harrah's most lucrative in 1995, accounting for 43 percent of its $354 million operating profit, followed by Atlantic City (22 percent), Southern Nevada (18 percent), and Northern Nevada (16 percent). Of Harrah's $1.55 billion in revenues that year, the riverboat operations accounted for 38 percent, followed by Atlantic City (22 percent), Northern Nevada (20 percent), and Southern Nevada (19 percent). Net income was $78.8 million.
A key marketing tool was the Harrah's Gold Card, accepted at each Harrah's property. Its database included, in 1994, 3.2 million cardholders and 3.1 million potential cardholders who had stayed at a Harrah's property or played in one of the casinos. In addition to enabling the company to follow trends in play and the popularity of certain games, the gold card was used to gather information on guests for marketing purposes and to reward them, based on volume of play.
Principal Subsidiaries: Aster Insurance Ltd. (Bermuda); Harrah's Operating Co., Inc.