From Good to Grand
By ripping out its best-performing venues, Gamal Aziz has reinvented the MGM Grand--and pioneered a radical new growth strategy.
(Business 2.0) – AT LAS VEGAS'S NOBHILL RESTAURANT, GAMAL Aziz is feasting on Tasmanian trout topped with apple-ponzu dressing and basking in the glow of parchment-paper chandeliers. But Aziz remembers this place sporting a very different look--gored concrete walls, disembodied wires--just after he ordered it gutted in 2001. "I walk into a place when I've caused its demolition and it puts me in touch with reality," he says, sipping a Santa Barbara chardonnay while waiting for a $43 entrée of Alaskan halibut. "This is what happens when I make decisions."
Those decisions have been hitting the jackpot for the MGM Grand casino resort, the home of Nobhill and the world's largest hotel. The restaurant that formerly occupied Nobhill's space, for instance, had been one of the Grand's top-earning eateries, but the makeover has almost tripled profits. Since taking over as the resort's president in 2001, Aziz has embarked on the service industry's equivalent of Sherman's march, ripping out hundreds of millions of dollars' worth of mostly profitable assets, including over 30 restaurants, bars, and shops, as well as entire hotel wings. The new venues have boosted total sales by more than 25 percent since 2003, making the Grand one of only two casinos (along with the Bellagio) to surpass $1 billion in revenue, while annual operating profit has zoomed up by 45 percent. "Gamal has done the near impossible," says Steve Wynn, a former mentor who owns the competing Wynn Las Vegas.
Aziz's secret is a counterintuitive management practice--nicknamed "working backward"--that he invented on his arrival at the Grand. The strategy breaks down an operation into constituent parts, then calculates the maximum potential revenue that each business or space could generate in a perfect world--that is, if every customer spent the most the market could bear and if traffic reached its physical limits. Aziz then subtracts actual sales from that hypothetical number and calls the difference a loss, even if the venue is making money. His formula for closing the gap usually starts with a jackhammer.
That's 180 degrees from the way most U.S. companies do things, which is to benchmark based on existing sales: Microsoft, for instance, is aiming for 12 to 14 percent growth next year on about $44 billion in revenue. Six Sigma, the management and benchmarking practice popularized by former GE chief Jack Welch, stresses improving current products by removing defects; to devotees, it would be anathema to close a profitable division. "If I listened to Six Sigma," Aziz says, "I'd still be sitting here five years later measuring things."
Aziz's working-backward epiphany didn't rise out of an MBA path. The 49-year-old earned a bachelor's degree in business at the University of Cairo, in his hometown, and managed restaurants at hotels such as the Plaza in New York. In 1998 he was hired to oversee the food division at Wynn's soon-to-open Bellagio. Determined to transform casino dining from a break-even business into a profit center, Aziz replaced several under-construction eateries with concepts featuring celebrity chefs, an approach soon copied throughout the industry.
In late 2000, Aziz was recruited by the MGM Mirage Group and soon promoted to head the Grand. Though the resort was the parent company's biggest moneymaker, executives were worried that it could go the way of now-defunct midrange competitors like the Desert Inn. More troubling to Aziz was the fact that the complex had become one of the worst examples of "Disney-fication" in Vegas. It had a theme park in its backlot (which Aziz ordered destroyed days after taking over) and a section of Family Feud slot machines. (Aziz got rid of those, too, to make room for a nightclub called Tabu, which brings in almost nine times as much money.) "We were a dormitory," Aziz recalls. "People were sleeping here and going somewhere else to party."
He set out to turn the Grand's venues into attractions rather than just functional outlets. His first target was Gatsby's, a restaurant with blue couches, a grand piano, and $2.1 million in annual sales. MGM's board didn't want Aziz to touch it--that is, until he showed them a projection that Gatsby's was "losing" $3 million a year in revenue. Aziz recruited chef Michael Mina, whom he'd brought to the Bellagio, to helm a new restaurant dubbed Nobhill. With Mina's name attached, Nobhill drew more customers, including Bill Clinton and Tiger Woods, paying higher prices. In 2005 the restaurant pulled in $6.5 million in sales, almost a third more than Aziz's projection.
Soon he decided to expand the formula beyond restaurants, starting in 2002 with the Grand's hair salon. The shop provided perfectly serviceable $55 haircuts to the resort's guests, but like Gatsby's, it wasn't a destination. So Aziz inked a deal with celebrity stylist Cristophe, who operates five salons and cuts the hair of stars like Madonna. Now a haircut at the Grand costs $110, or $400 if the man himself does your 'do. During the past two years, revenue has increased by 40 percent and profit by 23 percent. "This is the first business ever that I've opened on a Monday and by Friday was profitable," Cristophe says.
Next, Aziz aimed his wrecking ball at the hotel's 29th-floor penthouse. The top-floor suites had a 50 percent occupancy rate, which isn't bad in the casino market. But Aziz found it appalling that most of the luxury rooms were given away free to high rollers. The hotel's operations manager figured that, in theory, the maximum occupancy rate for such suites was 70 percent and that the rooms could command an average of $1,000 a night. To Aziz, that meant the Grand was squandering $1 million a month in potential revenue. But rather than ask high-net-worth gamblers to pay full retail, Aziz decided to target conventioneers: When a company booked a block of rooms, its C-level executives could stay in the penthouse suites. Last year Aziz converted the floor into a chic hotel-within-a-hotel dubbed Skylofts, which is attracting both convention-goers and moneyed Gen-Xers, pushing the occupancy rate up to 74 percent. Revenue, meanwhile, is up 90 percent.
Not all of Aziz's projects have been wildly successful. Consider the Grand's live entertainment, which, like penthouses, is usually a loss leader in Vegas. When Aziz arrived, the main attraction was a Broadway-style showcase called EFX, which variously starred former teen idol David Cassidy and aging dancer Tommy Tune. According to Aziz's calculations, it was shorting the Grand at least $60 million a year in sales. He asked the MGM Mirage board for $160 million to build a new theater, complete with a pivoting stage, for the Cirque du Soleil show Kà. The show certainly isn't a flop: It sold about $90 million worth of tickets last year, six times EFX's take. And since its tickets cost two to three times what EFX's cost, Kà also brings in bigger spenders. "People who come to our show are eating at the new luxury restaurants," says Cirque founder Guy Laliberte. But while Kà's 35 percent profit margin far exceeds EFX's break-even rut, it's not as high as that of O, the Cirque show at the Bellagio.
Aziz acknowledges there's more work to be done. "We're now looking at how to close gaps through means other than demolition," he says. Meanwhile, his idiosyncratic practices are beginning to catch on. Former Grand CFO Corey Sanders, who was initially skeptical of the working-backward idea, is conducting similar exercises at 15 of the parent company's 28 casinos. Sister properties, including the Luxor and Mandalay Bay, have raided some of Aziz's working-backward cadres.
Over dinner at Craftsteak, another Grand restaurant, Aziz attempts to downplay his radical reputation. "We're not just running around like crazy looking at how much money we're 'losing,'" he insists. Just then, Craftsteak's manager appears. "You freaked me out when you said you could get $16 million out of this place," Aziz jokes. "Not even I would have gone that far." The sales figure is double that of the institution Craftsteak replaced, the Brown Derby, which had been the Grand's most profitable eatery. Not only is Craftsteak already a third more profitable, but it's also closing in on the $16 million projection. There's nothing backward about that.
A Moneymaking Makeover Since Aziz took over in 2001, revenue at the MGM Grand has swelled 44 percent to hit $1.1 billion in 2005. Here's how he pulled it off.
[*] Operating profits. Source: MGM Grand
Paul Kaihla (email@example.com) is a senior writer at Business 2.0.