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Northern Nevada Casinos Face Tough Challenges

LAS VEGAS -- The gaming industry in Northern Nevada is getting nailed by a storm of competition from Northern California, with the worst yet to come.

After a decade of relatively steady growth, gaming revenues fell 6.5 percent in the Reno, Sparks and South Tahoe area in 2001, and analysts and industry insiders say tougher times are on the way.

Now, Reno and Tahoe are facing a perfect storm, with the area hit from three different directions at the same time: the high-tech-triggered recession in the San Francisco Bay area, improved slot product in California and expansion of tribal casinos in Northern Nevada feeder markets, Wall Street analysts say.

"I think the Reno market in particular is challenged," Deutsche Banc Securities analyst Marc Falcone said.

The Reno/Sparks market includes 17 casinos that draw visitors from primarily Northern California.

"As convenience gambling continues to proliferate in Northern California, there likely will be competitive pressures in Reno and to a lesser extent in Lake Tahoe," he said.

The expansion of tribal gaming in Washington and Oregon represents an additional, but secondary threat to the Reno/Sparks market.

"Tahoe is better positioned since it's also a destination market. Other (Northern California) results clearly are showing the impact of (California) competition," Falcone said.

The South Lake Tahoe market includes five casinos in Stateline that draw gamblers from Northern California, but its resorts also attract out-of-market ski enthusiasts to the area.

The economic storm clouds are getting more ominous heading into 2003, charged by both election results and casino developments in Northern California, analysts and insiders said.

"The (negative) impact I see at the present time (from the election in California) is a negative impact on Northern Nevada, Reno, Carson City, Lake Tahoe and some smaller downtown operations in Las Vegas from the impact they'll feel from Native American casinos in California," American Gaming Association President Frank Fahrenkopf said.

Gov. Gray Davis, who last week defeated Republican nominee Bill Simon in the California governor's race, supported renegotiating compacts with American Indians to allow for added slot machines at tribal casinos as well as casino banked card games, off-track betting, Internet wagering and advance-deposit wagering, a Bear, Stearns & Co. election analysis shows. Simon opposed expanded gaming operations.

"Historically, expanding markets has not had a large negative impact on Nevada," Fahrenkopf said. "The one caveat is Northern Nevada which has problems created by the spread of Native American-type gambling. Most experts expect a tremendously negative effect, especially on Northern Nevada in winter months."

New gaming opportunities and any "material" change in the number of slots (now 2,000 per tribe), will require the approval of the California governor next year.

Either development, both of which are more likely following Davis's re-election, could spur another wave of expansions in California, said Bear, Stearns analyst Jason Ader.

As 2002 winds down, analysts will be increasingly focused on the renegotiation of the tribal-state gaming compacts, due to take place between March-May 2003, Ader said.

Although Southern California has seen the most rapid development in tribal gaming to date, several major projects in Northern California are nearing approvals, including one in Sacramento and one in the East Bay area, Ader said.

For example, plans are under way for a $100 million United Auburn Indian Community casino in East Sacramento to be managed by Station Casinos for a seven-year period.

In addition, the Upper Lake Tribe of Pomo Indians last week signed a deal to launch its campaign to build a hotel-casino off Interstate 80. Under the agreement, the tribe would give the city of West Sacramento more than $72 million over 12 years to pay for municipal services for the project.

The tribe also is proposing a Las Vegas-style hotel-casino in the Bay area. Both projects are more likely to get needed state approval under the second Davis administration than they would have been under Simon, analysts said.

Because of the election returns and proliferating Indian gambling, "we remain cautious (about) the longer-term growth prospects in Reno, given the lack of must-see attractions, visitor loyalty and infrastructure, Ader said.

"Conversely, we believe that these three characteristics, in addition to a more favorable year-round climate ... will keep Las Vegas competitive regardless of tribal developments in Southern California," he said.

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