There are two definitions for the word “affinity” in the dictionary—having a spontaneous liking for someone or something and a similarity of characteristics suggesting a relationship. Both these meanings are apropos when it comes to describing the business strategy of Affinity Gaming, the Las Vegas-based diversified casino company with 11 brick-and-mortar properties in Nevada, Colorado, Missouri and Iowa.
Under the leadership of CEO Michael Silberling, Affinity Gaming has scored marketing gold with a campaign emphasizing slot, food and fun, creating a hyper-friendly atmosphere within their properties akin to the old television series Cheers; to the point where the show’s old catchphrase is the basis for ongoing branding campaigns at certain facilities (at Affinity’s Mark Twain Casino in Missouri, it’s “Come to the Mark Twain, where everyone knows your game.”) Meanwhile, despite the varied regional locations and demographics of Affinity’s property portfolio, each facility squarely appeals to the mid-market gaming consumer, which has allowed Silberling and his management team to implement operating efficiencies that have created industry-leading EBITDA in addition to revenue growth.
Indeed, Affinity has performed so well over the past couple of years that part owner Z Capital Partners entered into a definitive agreement to acquire Affinity and become sole owner in an all-cash transaction that values the company at $580 million.
Prior to the announcement of the acquisition, Silberling took some time to discuss Affinity Gaming with Casino Journal Editor Paul Doocey. What follows are some excerpts from that conversation.
How did Affinity Gaming come about?
Silberling: Affinity Gaming is the successor of Herbst Gaming. Herbst was founded in 1987 and lasted until 2011, when it went into Chapter 11. The company was renamed Affinity Gaming when it emerged from bankruptcy.
What does Affinity Gaming consist of now?
Silberling: We have 11 casinos in four states—five in Nevada, three in Colorado, two in Missouri and one in Iowa. Certainly the flagship and the biggest properties are in Stateline between California and Nevada. If you are driving from Los Angeles to Las Vegas, we would be the first Nevada casinos you come across right at Stateline with Primm Valley Resort & Casino, Whiskey Pete’s Hotel & Casino and Buffalo Bill’s Resort & Casino, where we have got the rollercoaster, outlet mall and all the rest.
All of our other casinos are a little bit smaller and include Silver Sevens Hotel & Casino in Las Vegas, at the corner of Flamingo and Paradise, one of the busiest intersections in the city. We also have Rail City Casino up in the Reno/Sparks area, Lakeside Hotel Casino in Osceola, Iowa, Mark Twain Casino in Lagrange, Mo., St Jo Frontier Casino in St Joseph’s, Mo., and in Blackhawk, Colo., we have the Mardi Gras Casino, Golden Gates Casino and Golden Gulch Casino.
Where does the company stand now in terms of revenue?
Silberling: We’re a mid-market casino company. If I rounded the numbers, I would say we do $400 million in revenue. That is up a tad from what we generated in 2015. What I am really proud of is that we had 30 percent EBITDA growth in 2015. I am not aware of any other brick-and-mortar casino company in the U.S. or worldwide that exceeds our profitability growth.
How did you get involved with Affinity Gaming? What do you feel you bring to the company?
Silberling: I was recruited. The board of directors hired a search firm to fill the post and they came knocking on my door in 2014. I had a goal of being a CEO… I had been with Harrah’s and Caesars throughout my career, had actually managed business units with more casinos over a wider geographic area, but always as a general manager or division president, never as a CEO. I appealed to them because I had previously managed properties in Affinity’s markets—northern and southern Nevada, as well as a stint as president of Midwest operations for Harrah’s Entertainment. So, the fact that I had experience in these markets and had managed a company of this scale convinced the board to give me the job.
My experience at Harrah’s/Caesars was solid training for running Affinity. Harrah’s certainly taught me the value of data in decision making and making informed decisions. I think it was an excellent company in terms of corporate governance; in doing business the right way, in being committed to the employees, customers and local communities, all of which helped drive financial performance. It was solid grounding for my role here.
Affinity is a geographically diverse company with 11 casinos in four states, in both urban and rural areas. Was this diversity all part of the plan? What are the challenges of operating in so many different markets?
Silberling: The portfolio was given to me when I arrived in 2014, I did not develop it. While we may have different demographics for each property, I would say that there are some constants throughout all our properties and markets. At all our casinos, we focus on the customer that pulls $200 out of their wallet per visit. A lot of properties ignore this customer, but at our facilities they are going to be treated like a very big deal.
Except for the Primm-based properties, the size, scale and profitability levels are similar throughout all our resorts, so we can bring the same set of operating efficiencies to all. Operating our properties in an increasingly more efficient manner is leading to our EDITDA growth.
Will Affinity ever consider ground-up development? Are there specific parts of the country or world the company is targeting for future expansion?
Silberling: In the two years that I have been here, growth has come from same store sales… the aforementioned 30 percent increase in EBITDA, for example. During my tenure, we have not developed or acquired casinos. That said, the strategic options for the company do include acquisition and development, and that is something that the board is discussing. We just recently had a very successful debt restructuring that took our interest payments from roughly $30 million down to $15 million, along with a revolver. So we now have good free cash flow and a strong balance sheet that would allow the board to evaluate the strategic opportunities.
It’s no secret that the U.S. casino gaming marketplace is becoming increasingly competitive. How is Affinity attempting to stand out from the crowd? What makes an Affinity Gaming experience unique?
Silberling: The driving marketing mantra for us is “slots, food and fun.” We have high-visitation properties; our average patron is not the once-a-year customer going to a megaresort. Our casino business profitability model is driven by slots, so we need to have good products, good service and compelling promotions. We also spend a lot of time trying to get our food right. The fun depends on what the property can handle. At Primm, we were written up in the New York Times for our Hispanic marketing… we have Hispanic concerts that completely fill the place. We also host mainstream entertainers such as Gladys Knight and Jeff Foxworthy. Other properties have entertainment as the facilities allow; we just had 38 Special in Iowa, for example.
When I joined the casino business in the 1990s, the mentality was just “shut up and deal.” That is certainty not our business philosophy. It is important for us to have a Cheers mentality, where “everybody knows you name.” In fact, we use that as a marketing slogan... in Missouri, it is, “come to Mark Twain Casino, where everybody knows your game.”
That is how we try to position ourselves, even though we have different demographics, what still hold true is “slots, food and fun.”
How would you describe the Affinity Gaming customer? Are they locals, regional customers or a mix of both?
Silberling: Our customers are overwhelmingly local. In some of our markets, we have quasi-monopolies since customers would have to drive more than an hour to get to another casino. That is especially true in Osceola and Lagrange… all of our Midwest businesses, for that matter. But our Las Vegas and Colorado properties are very different—they are hyper competitive markets that cater to very high frequency players. Primm is a little bit of an outlier… it requires more appointment-type marketing since customers need to drive past California Indian casinos and avoiding the Laughlin-based options. We need to emphasize entertainment, promotions, golf weekends and those types of things to keep the customers coming.
What are some of the marketing steps Affinity is taking to both maintain and grow its traffic and customer base in an increasingly competitive marketplace?
Silberling: On the marketing side, we have become a more data-driven company. We have become much more sophisticated in our direct mail efforts and on or customer relationship management (CRM). When I came on board, we had no CRM system whatsoever; now we have one installed so we can tell when a customer’s birthday is, if they like boxing, if their play is declining, etc. This allows us to better manage that higher-worth customer on a much more personal level. We are really trying to take our marketing from mass marketing to one-on-one and personalized marketing.
Another aspect of running a business in a competitive market is finding ways to improve operational efficiency. How has Affinity Gaming accomplished this goal?
Silberling: When you look at a business that has slight revenue gains and massive profitability gains, I am sensitive in that I do not want to be called a “cost cutter.” No one gets a memo from me saying “take 10 percent of the cost out of the business.”
Instead, we have tried to become much more efficient in how we do business. For example, at our Silver Sevens hotel, we used to take more than six minutes to check someone into the hotel. We have now got that down to two minutes and are closing in on one minute. We did that by looking at the ergonomics of our setup and making simple corrections and adjustments.
We now schedule to demand as well. We used to have dealers standing around at empty tables, we don’t do that anymore, which means I’m spending less money and dealers have higher tips per hour because there are less people around to divide the money. It used to be we would lose dealers to larger resorts because they could get higher tips… now that we are able to offer comparable high tip percentages, our turnover is less.
Most of our efficiencies have actually been on the marketing side. We have really looked at customer elasticity of demand, and found that in many cases we were too “layered” with our marketing and promotions offers. We were giving all these discounts to customers that we did not need to… including enough free-play coupons to make sure they never had to open their wallets at the property. Those are customers we had a negative and unprofitable relationship with, and our data was so poor we didn’t know it. Now we have much better data, and are able to determine which customers should get nothing, which deserve an offer and which should get multiple offers.
That has been the substantive part of our growth in 2015. We look for profit, not revenue. There was a term I coined called “profitless prosperity.” Anyone can drive revenue… give me a bus and some buffet and free play coupons and I will have a full bus and will increase the revenue of the casino, but I will not make any money. I call that profitless prosperity, and we are out of that business.
How did you discover these efficiencies? What data systems did you use?
Silberling: Another mantra of mine is “people, profit and technology.” I would like to give a shout out to the team and leaders Walter Bogumil, our CFO, and Vincent Lentini our CMO. They came in, much like I did, distasteful of inefficiency, decisions not driven by logic and data. We started working with the technology we had as well as putting on additional technology platforms like Duetto, a hotel yield system we did not have before. Using this technology, we now have 98 percent occupancy at Silver Sevens… your yield occupancy is much better when you have more demand than rooms and we were able to sell the rooms instead of dumping them.
We also added a CRM system and have approved out BI systems and we have the right people across the board looking at processes we can improve, like hotel check in and room occupancy.
Our focus has been on getting the basics right first and then trying to improve from there. I like to have the problem of scale and growth in the future, but right now I think we are a small enough business to be nimble and can make these decisions and move quickly. I like that. If there is stuff out there that is industry-leading, I want to be nimble enough to adopt it.