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Twin Cities Business
By: Adam Platt
Posted: 4/29/2016
The boom phase of tribal gaming ended long after the Shakopee Mdewakanton Sioux opened Mystic Lake Casino nearly a quarter century ago. Many tribes, in Minnesota and elsewhere, have seen flat growth or diminishing returns and are searching for economic engines to supplement casinos—notably the Mille Lacs Chippewa.
But the Shakopee Mdewakanton Sioux Community (SMSC) has had no such troubles. In fact, its operations continue to thrive, based on the limited information available. Due to the liberal compacts negotiated in Minnesota and American Indian tribes’ status as sovereign governments, nothing is reported publicly (including to the state) about the operations in their midst. (The tribes provide metrics and pay taxes to the federal government, but data is not released.)
Credit a prudent, conservative approach to management, wise strategic alliances, a lucky stroke of location, or a tiny membership sustained by a casino operation that some estimate to generate over a billion dollars in annual revenue—whatever the causes, the SMSC looks to the future with few of the cares facing its peers.
Not a business
“We don’t run businesses,” says SMSC legal counsel William Hardacker. “It’s tribal government, plain and simple.”
Although it may operate the state’s most lucrative tribal enterprise, SMSC representatives are emphatic that its land near Prior Lake is not a corporate campus but a seat of government.
His point is that the SMSC’s commercial enterprises, as they call them, exist not to maximize return, spin off startups or serve a collection of investors, but to endow a community and help provide for its well-being. From the beginning, Mystic Lake had codes of competition that no business would ever shackle itself with.
“Chairman [Stanley] Crooks wanted us not to compete with other gaming tribes in their trade areas,” explains Ed Stevenson, president and CEO of the SMSC’s casino operations. “We don’t buy billboards near Treasure Island. If Grand Casino is doing a promotion and giving away two cars, we don’t give away five.”
Tribal casinos, as entertainment businesses go, have unique advantages. Gamblers cannot comparison-shop payback rates or odds. The business model is entirely opaque to the customer—dollars flow into a black box. Are the odds competitive? The likely answer: People who visit tribal casinos really don’t care.
“ROI from casinos is all cash and pretty phenomenal,” explains Patrice Kunesh, assistant vice president of the Center for Indian Country Development at the Minneapolis Federal Reserve. “It isn’t like other businesses.”
Fortress and foresight
If one message comes across in meetings with SMSC tribal and casino leadership, it is a focus on the long view. Stanley Crooks, who served as tribal chairman from 1992 until his death in 2012, worked to maintain “the principle of planning seven generations ahead, and it underlies all the decisions that are made here,” explains Hardacker.
(Much of the friction between the tribe and its neighbors over the years can be traced to those decisions. “The tribe continues to purchase land, because every member gets an acre and they are planning for generations of growth,” says Brad Tabke, who served as Shakopee mayor from 2012 to 2015. That land is ultimately taken off Scott County tax ledgers.)
Crooks’ influence is manifest in the SMSC’s national reputation. “You have very minimal regulatory oversight in Minnesota,” says Dave Palermo, who has been reporting on tribal gaming since its inception, “but the tribes there have a reputation for doing a good job at managing their operations.”
“We take a long-term view, not a quarterly one,” Stevenson observes.
And though leadership is quick to reject the “business,” label, “It is a very disciplined operation,” insists Randy Sampson, president and CEO of Canterbury Park Holding Corp., a longtime competitor that’s now in a 10-year partnership with the SMSC. “Chairman Crooks was an absolute tiger about corruption, correct operating practices. Ed is an exceptional casino operator.”
“One of my first tasks here [in 1992] was long-term planning,” explains Stevenson. “Our master plan was conservative. We knew the opportunity but weren’t sure how big ‘big’ was. It has exceeded anything I expected.”
The saturation effect
But tribal gaming has hit a wall. “The recession hit tribal gaming hard,” says the Fed’s Kunesh. “Tribes learned they needed to look beyond here and now, and diversification is the best way to maintain income flow; any community with a single industry is at the mercy of that industry.”
As tribal and corporate casinos proliferated across the country (of the 566 federally recognized tribes, 247 operate over 450 casinos), oversupply developed. “After double-digit revenue growth from 1988 to 2008,” says Palermo, “growth has slowed substantially.” (National tribal gaming revenue grew 6 percent from FY2008 through FY2014, after growing 182 percent in the previous six years.)
The impact in some parts of the country has been devastating. Tribes in Connecticut were overwhelmed by expansion debt, yet their elaborate operations all but subsumed northern New Jersey casinos. “Look at Atlantic City,” says Kunesh, “if you want to see what happens when there’s oversupply.”
Locally, gaming tribes have avoided cannibalizing one another, and today they see little upside from adding sites or slots. “The gaming market is saturated in Minnesota,” says Hardacker.
As such, diversification is a watchword in much of Indian Country—but not so much in Prior Lake. “The most successful gaming tribes,” explains Kunesh, “don’t have to think outside the box as much.”
The SMSC has managed to find growth and insulate itself from risk by adding amenities and making partners of longtime competitors. The most notable is its 2012 alliance/investment in Canterbury Park.
For years Canterbury had lobbied the Legislature for “racino,” slot machines at the horse track. “Nationally, tracks with slots prospered,” says Sampson. “Ones without didn’t.” Racino portended an end to the tribal slot monopoly and a direct competitor on the SMSC’s doorstep.
“Ed Stevenson called me,” recalls Sampson. “Horse racing was in a death spiral. We were making a hard push for racino. Legislators kept asking, ‘Can’t you work together?’ It was a decade-long effort for racino, and because of it we couldn’t work with the SMSC on anything.”
After several conversations and a vote of the tribal membership, the SMSC offered Sampson $75 million over 10 years to augment racing purses and enhance marketing, on the condition that Canterbury drop racino efforts and the attendant lobbying at the Capitol. (SMSC has no management role or stake in Canterbury.)
Sampson’s sense of the tribe’s motivation: “They believed Canterbury was complementary to their businesses and didn’t want it to die at their hands [and damage the tribe’s reputation]; racino had sympathizers at the Capitol; [and] the annual friction over it was not in the tribe’s interest—with constant reminders to legislators about their not paying taxes.”
The alliance has proven the rare win-win. “It’s been fantastic for us,” says Sampson. “It has turned racing around in Minnesota.” Sampson says the track currently generates 29 percent of its revenues from horse racing and 56 percent from poker and related table games.
The RiverSouth initiative
Once Canterbury and the SMSC began working together, horizons broadened. The Shakopee region is also home to Valleyfair and the Renaissance Festival, and there was a supposition that all the entertainment attractions could market jointly. A moniker called RiverSouth was created.
“It has gotten off to a slow start,” says Sampson. “We’re trying to figure out its potential. Short term, the best opportunity is to combine efforts and advertise regionally to non-metro residents within a day’s drive.”
Longer term, the goal is economic development. “We need hotels [there are currently 1,300-plus rooms in RiverSouth] and businesses like restaurants,” says former Shakopee mayor Tabke. The region struggles with an inadequate supply of affordable housing and public transportation, and thus has a shortage of workers, he says.
The ultimate goal is to attract “other entertainment-type businesses and increase visitor spend,” says RiverSouth executive director Bill Von Bank. “We want to be viewed as a branded tourism destination like Wisconsin Dells.”
The cooperation has also had a salutary side effect: “It has created a spirit of cooperation [between the tribe and communities],” says Tabke. “We had historically poor relationships due to land control issues. The tribe wouldn’t do business with Shakopee-based contractors. Residents had a lot of envy toward [SMSC members].” Tabke says land-use disputes remain, but citizens are starting to see benefits of having SMSC integrated with neighboring towns and businesses.
A thirst for cocktails
Under Crooks, the SMSC was a dry community, including its gaming operations and restaurants. Alcoholism’s toll in Indian communities has been well documented, and the SMSC built its casino empire without the booze that flows like water in commercial casinos.
That changed in 2012, in response, say SMSC leaders, to years of customer requests. Today, the SMSC does not comp alcohol, but it is freely sold and is driving a substantial new revenue category, suggest knowledgeable observers. It also portended a reimagining of the Mystic Lake business model.
“Alcohol brought conventions and customers,” explains Stevenson—the kind of customer who views a cocktail as an essential part of a worthwhile conference or night out. “We studied [adding alcohol] extensively and it beat our projections.” Mystic’s current hotel and conference center project (180 hotel rooms and 700,000 square feet of meeting space) was made possible by the new business that alcohol has generated.
And it’s a reminder of other sources of undeveloped potential. “Atlantic City casino resorts’ revenue mix is 70 percent gambling. Tribal casinos are 80 to 90 percent,” explains economist Alan Meister, who publishes the annual Indian Gaming Industry Report. “Diversifying that with entertainment and other amenities is a big opportunity for some tribes.”
Stevenson adds: “Some Las Vegas casinos are deriving 60 to 70 percent of income in [non-gambling revenue]. Our market has potential for more entertainment dollars. As amenities grow, so do customer counts.” He is skeptical that the SMSC can innovate on the culinary front (Las Vegas has evolved into a gourmet destination), insisting that he’s yet to see evidence his guests are willing to pay premium prices to eat, but he admits he may not have the right mix of products to disprove the possibility.
Far-Flung Giving
The Shakopee tribe’s philanthropic legacy ranks among the state’s most substantial.
The SMSC is known nationally for its charitable works. Tribal giving peaked at nearly $29 million in FY2012 and stood at $18 million in FY2015.
“They are believed to be one of the top two or three tribes nationally in charitable giving,” says tribal gaming expert Dave Palermo. The bulk of the philanthropy is directed to the many impoverished tribal communities around the state and neighboring states. The SMSC’s mobile medical facility travels thousands of miles a year, offering dental care, vision services and mammography to populations without access to preventative medical care.
The SMSC also makes grants and loans to tribal communities and causes around the Upper Midwest, including non-tribal organizations like the YWCA and Minnesota Children’s Museum. It augments public sector resources, donating 900 automatic defibrillators to public agencies (including all State Patrol cars). It also partners with neighboring counties and municipalities on road projects.
MOA-bound?
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Many have looked to the SMSC’s $105 million investment in the JW Marriott Hotel at Mall of America as a sign that the tribe has embarked on a diversification strategy like the Mille Lacs Chippewa band has. But, says Stevenson, “it is a passive investment, not a harbinger of things to come.”
Based on back-of-the-napkin revenue estimates, the SMSC is thought to have billions of dollars held in trust for the betterment of the community, but rarely are such holdings delivering powerful returns. “[Tribes need] more sustainable income,” explained Merrill Lynch managing director of wealth management Peter Eckerline, based in Wayzata, in a 2015 Wall Street Journal article. “Persistently low interest rates have compelled tribes to examine investments previously deemed too risky” or low-return.
Stevenson confirms this in a manner of speaking. “The community’s savings portfolio evolves,” he says. “[MOA’s corporate parent Triple Five Group Ltd.] came to us, and a consulting firm ran the numbers. There seemed to be a long-term benefit.”
For the short term, the SMSC’s small size and outsize revenue base—plus the metro area’s strong population growth—have proven enough to insulate it from the stagnation in domestic casino play. But it will have to pivot to generate its next wave of growth.
“A day may come when we have to look beyond our borders,” says Stevenson. “For now we’re focused on RiverSouth and improving our operations here.”
A millennial meltdown?
Stevenson is retiring in autumn, and one topic his successor cannot ignore is how the SMSC will cater to the millennial gambler—a customer cohort that is making casinos, like every other consumer business, nervous.
Tribal casinos’ current bread and butter are baby boomers (and older) who sit solitarily at slot machines, letting the random-number generator inside do the gambling for them. Slots are the most profitable of casino games. Palermo estimates the SMSC derives over 90 percent of its casino revenue from random-number machines.
Problem is, early returns on boomers’ kids are ominous. “Millennials are showing up, but they are not playing slots,” says Palermo, who cites an Association of Gaming Equipment Manufacturers study indicating slot wagering has fallen 23 percent since 2006. “Younger gamblers gravitate to table games, which are labor-intensive and offer less consistent returns for casinos.”
Stevenson confirms that his younger customers are “not typical slot players. They are social, group-oriented, and prefer skill games like blackjack.” His team is “creating lounge-like areas where you can bet and socialize.”
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The dilemma is that Minnesota tribes are restricted to random-number games and blackjack. To add a critical mass of “skill-based” games such as poker, roulette, craps or sports betting would require reopening compacts with the state, where tribes could be forced to make tax concessions or be subject to commercial competition.
Time may be on casinos’ side. “I think we have a decade before we get a significant millennial population in the casino,” said Jamie Stuck, vice chairman of the Nottawaseppi Huron Band of Potawatomi, which operates FireKeepers Casino Hotel in Battle Creek, Michigan, in a 2015 article in Global Gaming Business.
The greatest concern about millennials is their love affair with their phones. “Internet gaming is the major threat to tribes,” says Palermo. “Gaming is going mobile like everything else.”
A Different Strategy at Mille Lacs
The Chippewa actively seek new ventures to diversify income streams.
If the Shakopee tribe is the exception that proves the rule, the Mille Lacs Band of Chippewa is the embodiment of the rule. “Immediate and long-term trends suggest a softening in gaming for most operators in the Midwest,” says Joe Nayquonabe Jr., commissioner of corporate affairs for Mille Lacs Corporate Ventures. “Seeking growth, as any good corporation is compelled to do, we put together a focused strategy.”
The band that operates Grand Casinos Hinckley and Mille Lacs has diversified into hotel ownership/management, other hospitality businesses and unrelated businesses.
“Our targets are driven by the needs of our shareholders, our Mille Lacs Band members,” continues Nayquonabe. “Our population is growing at 2.6 percent a year, meaning the needs we fund through our company’s profits are rising and we have to keep pace.”
“Gaming will always be at the core of what we do,” says Nayquonabe, “but it would be a mistake not to put those dollars to work by diversifying and investing in long-term appreciating assets that will ultimately bring about complete economic independence for our tribe.”
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Rooted in Sustainability
Most SMSC business innovation is dedicated to local problem-solving.
The JW Marriott at MOA is a passive investment for the Shakopee community, but “tribal economic development is mostly focused on the reservation,” explains SMSC general counsel William Hardacker. There the band operates a number of small businesses created to address challenges or problems, rather than drive returns. These include:
An Organics Recycling Facility (ORF), which receives tribal and municipal yard and food waste and recycles it into grades of compost sold to municipalities and contractors. “The ORF is profitable,” says Hardacker.
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Koda Energy, operated in conjunction with Rahr Malting. It takes surplus wood, malt byproducts and oat hulls to generate biomass energy.
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An elaborate fitness center and wellness facility, Dakotah!, operated by the SMSC, which serves tribal members, employees and neighbors. It also manages Wozupi Tribal Gardens, an organic farm that supplies Mazopiya, an SMSC-owned natural foods market open to the public. All these share the common goal of improving access to healthier lifestyles. Hardacker notes that this last group of enterprises was not created to generate income.