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Casino expansion plan a threat to businesses, professor warns

Earl Ketry has big dreams for downtown Buffalo, but he fears an expanded casino getting in his way.

The founder and owner of the Pearl Street Grill & Brewery, working with Rocco Termini, plans to be part of the $40 million Hotel Lafayette makeover by reopening the Lafayette Tap Room, quadrupling its size, filling it with microbrewing equipment, and opening a multilevel outdoor patio.

"We're going to create a brewery district downtown, a scratch brewery district," Ketry said. "A few of us are at the point here that if we can pull this off, it will make a big difference in Buffalo.

"Why put a casino in here and screw that up?"

Ketry is among several Buffalo restaurateurs wary of the Seneca Nation of Indians' latest moves to reimagine its Buffalo Creek Casino. Their concerns are fueled by the continuing work of Steven H. Siegel, a Niagara University associate professor who warns that a larger casino presence on the Buffalo waterfront will threaten the city's hospitality industry.

Siegel, who works in the College of Hospitality and Tourism Management at Niagara, lives in a loft apartment within a mile of the casino in downtown Buffalo. His economic theory when it comes to urban Indian casinos boils down to this:

"It's hard to compete with free."

He spent five years studying the impact of Seneca gambling operations on the hospitality industry, and reached several conclusions:

The sheer volume of the Seneca gambling business gives it advantages others in the dining and entertainment trades can't hope to enjoy. Siegel estimates that a total of about $6 billion is gambled each year in the Seneca casinos in Buffalo, Niagara Falls and Salamanca, and bettors lose more than $500 million of that money, which the Senecas can use as working capital.

The Seneca Gaming Corp. can afford to invest more than $100 million of that money on nongambling enterprises, give away more than $50 million in nongambling products and still make more than $100 million after all of its gambling and nongambling expenses are paid.

It would be hard for anyone in the hospitality industry to compete against a company that through its Seneca Players Club gave away the equivalent of 80 percent of its hotel rooms, 52 percent of its food and beverages and 73 percent of its concert tickets during the most recent period Siegel examined, Oct. 1, 2009, to June 30, 2010.

Lodgings, restaurants, concert venues and theaters can't begin to match those kinds of discounts, and the playing field becomes more unequal when advantages that come with Seneca sovereignty also are considered -- no sales taxes, no property taxes, less regulatory red tape, and no need to abide by the state smoking ban.

"We're Buffalo zealots who want to invest money," Ketry said of he and others with projects planned in and near downtown Buffalo. "But how are you going to compete against somebody with an almost 40 percent advantage?"

Several Buffalo Common Council members have expressed reservations about the planned Buffalo Creek Casino expansion in the wake of Siegel's report, which the professor put together as part of his research, not at the behest of any anti-gambling group.

Citizens for a Better Buffalo, a group fighting the existence and expansion of the Buffalo Creek Casino, has made Siegel's work part of its continuing legal fight to halt casino operations.

> A new philosophy

Leaders of the Seneca Nation and its gambling corporation are aware of Siegel's work, and have adopted a new philosophy when it comes to expanding their "temporary" casino on a 9-acre patch of land at Michigan Avenue and Fulton Street.

Seneca President Robert Odawi Porter told The Buffalo News that the nation has decided against a 2007 proposal to build a $333 million casino that would include 90,000 square feet of gambling space, 2,000 slot machines, a 22-story, all-suite hotel, four restaurants, a full-service spa and salon, and retail and other amenities.

Porter said the nation will not build a hotel on its sovereign site and that any restaurants put up on the property would look to complement, not duplicate, the kinds of restaurants that exist, or are planned, nearby.

The Seneca Gaming Corp. also will look, for the first time, to include businesses off casino property in its Players Club program, which gives discounts on food, beverages and hotel rooms to bettors.

Siegel said he is encouraged with the Seneca's outreach but still maintains there are dangers in the planned expansion.

"If that casino gets built down there, it definitely changes everything," he said.

If the idea is to build something smaller than intended four years ago, he added, he'd like to see specifics and a promise "in writing."

Be patient, said Seneca Gaming Corp. spokesman Phil Pantano.

"There's a lot of 'what if's' about what the casino is going to look like, what it's going to include, but we don't even know that yet," he said. "The planning process needs a chance to play out."

> Not anti-gambling

Siegel, 60, grew up in the Town of Tonawanda, earned a bachelor's degree in Social Sciences at Buffalo State College and worked for nine years at Holiday Inns in the region. He left his job as co-general manager at the Delaware Avenue property in 1977 to take a teaching job at Niagara University. He earned an MBA at the University at Buffalo in 1980.

He has taught courses in finance and quantitative-based business applications.

Most of those fighting the existence and expansion of the Buffalo Creek Casino often have argued on moral or ethical grounds. Siegel said he understands that some see gambling as a means of recreation and that people have a right to gamble if they want.

"I'm not anti-gambling," he said.

For Siegel, opposition to Seneca casino expansion is strictly business -- what he calls the "economics of equality."

He has spent the last five years looking closely at the financial numbers the Seneca Gaming Corp. has been required to provide to the federal Securities and Exchange Commission.

The latest filing shows that the Senecas take about 8 cents in profit for every dollar gambled at their casinos.

If you know you're going to keep 8 cents on every dollar, and you're going to deal with billions of dollars in money wagered, "everything else falls into place" businesswise, Siegel said.

"It's the basis of a competitive advantage that can put restaurants out of business," he said.

The Senecas can afford to give away about one penny of every dollar gambled in free hotel rooms, meals and entertainment tickets. This discount can amount to more than $50 million a year, based on the sheer volume of bets placed.

"They have a strategy for the [gambling] corporation, but also a strategy for individual businesses," Siegel said, "and it makes perfect sense what they're doing. Businesses do that all the time."

The strategy boils down to steering customers back to the gambling casino, Siegel said, keeping them on Seneca property as long as possible and continuing to collect a percentage on every dollar bet.

Including nearby restaurants in the Players Club program will allow the Senecas to reduce the cost of their "loss leaders" -- the businesses they can afford to lose money on -- Siegel said, and still attract a steady supply of customers within a short walk to the spot where the Senecas make their profit: the gambling floor.

"All they have to do [to make more money] is negotiate contracts that allow them to reimburse outside partners at a redemption rate for Player points that is lower than what they redeem them for within the casino," he said.

> Worrisome dynamic

It's a dynamic that worries Ketry and others. The Senecas plan to strike individual deals with nearby restaurants to accept Players Club cards, which would force those businesses to help subsidize the casino, he said.

Those excluded from the program will have to compete against those in it, as well as with the Senecas, he said.

The Senecas "throwing a bone" in terms of Players Club discounts will force restaurants to give discounts to their customers, he said. The Senecas will have gambling profits to make up the difference, but nearby restaurants won't. He also says the Senecas will draw even more bettors into their casino and that the arrangement ignores the bigger competitive advantages that still will be exclusive to the Senecas.

"One of the other things that terrifies us," he said, "is what are they going to do on HSBC event nights?"

The Senecas will enjoy huge benefits on the waterfront, Siegel said, and could make other restaurants in a Seneca Players Club discount district beholden to the gambling corporation for survival. And if there's a dispute between the parties, he wondered, how will that get handled: before a local court or the Seneca tribal court?

"I just think it's blatantly unfair public policy," said Mark Goldman, the owner of Allen Street Hardware who launched the birth of the Chippewa Strip 20 years ago with the opening of the Calumet Arts Cafe, which he sold last year. "Most everyone I know in the industry is concerned about it."

> Three zones in plan

Buffalo works on a thin margin when it comes to the profitability of its "very fragile" hospitality industry, Siegel said. The blessing is that this has tended over time to keep most big restaurant chains out of the city, in favor of smaller local restaurants that can make a decent profit -- and help make Buffalo different, he said.

Add a collection of these restaurants to a neighborhood, and you can create a hive of economic vitality. As the years unfold, there will be a normal turnover of businesses, and new entrepreneurs will surface, with new ideas, who may be able to make a modest profit.

Put several restaurants into a nearby casino, and start to give away half the meals, and the ability of competitors to make a modest profit disappears, Siegel said.

Siegel said the Senecas' new, more-cooperative plan essentially sets up three zones in the Buffalo hospitality industry:

The first zone is the casino property, propped up by gambling profits, where the Senecas don't have to charge taxes and have other benefits.

The second zone is the neighborhood around the casino, where Players Club points may be offered by businesses that join the Seneca's plan. Those spots "pay all property, income and sales taxes and fees and cannot afford to operate at a $55 million to $60 million loss, because they do not sell another product [gambling] that generates $100 million a year in corporate profits," Siegel said.

The third zone is everywhere else. These spots are on their own.

Those who gamble and rack up Players Club points will have the equivalent of "a big old discount ticket," Siegel said.

"Economically," he said, "it's going to draw business away from Elmwood, Allen Street, Chippewa Street," he said.

> Advantages defended

Porter, the Seneca president, doesn't apologize for the competitive advantages that the Seneca casino properties enjoy in Western New York. They were hard fought, he said, and came at a cost over the centuries in the loss of land, including 10,000 acres seized by the federal government during the 1960s for construction of the Kinzua Dam.

He pointed out that many businesses, including hotels, restaurants and shopping malls, provide discount programs for customers. And others point out that state and local development agencies also give tax breaks, low-cost electricity and other benefits to many private businesses.

"We've paid for our freedoms," Porter said. "Our treaties protect the free use and enjoyment of our lands. We're not going to pay twice."

The gambling compact in 2002 that paved the way for the Seneca gambling empire "had everything to do with an economic climate in which the state wanted to create jobs," Porter added. " It was a marriage of opportunity."

Seneca leaders and their supporters often note that the Seneca Gaming Corp. has 3,700 employees, an annual payroll of $110 million, and pays out about $100 million a year to local vendors and suppliers.

"It looks really good when you can point to something that happens on your watch," Siegel said. What is often missed, he said, because it can happen more quietly over time, is the loss of jobs in nearby businesses, and an erosion of the local tax base.

"What I find reprehensible is that politicians see this as a benign source of revenue," Siegel said. "It's not."

Monday: Impact of the Seneca Niagara Casino & Hotel on Niagara Falls.