KEY POINTS:
It has been the corporate money tree for the past 10 years, funding Australian casino acquisitions, movie theatres, restaurants and a luxury hotel.
Touted as the "jewel in the crown", Sky City's main gaming floor is now 10 years old and getting a $40 million makeover.
Sky City
shareholders were told this week that the casino operator's half-year profits had fallen 23 per cent from the year before, with the $45 million profit hit hard by big losses at its VIP tables and a fall in revenue from its Auckland gambling operations.
With hotels, bars, a theatre and restaurants all now clustered around the gambling floor in Auckland, attention has now turned to the great cash generator that made it all possible.
A new look, new machines and a new focus on warmer customer service are all part of this revamp, which should be complete by the end of this year.
"We were clearly disappointed in the result of the first half of the year; we think there are some external issues that will take a little time to work through, but we are focused on ensuring that we do improve that Auckland performance," said managing director Evan Davies.
He told the Herald on Sunday that Sky City was not "behind the times", since the "experience" was better than alternatives seen in New Zealand pubs and clubs. "But we have come to the view that it's time for a 're-presentation', for a new experience to be offered to our customers," he said. "That's not because it was worn out in any sense, it's because when you've been offering an entertainment experience for an extended period of time, from time to time you simply need to refresh it."
Davies said it was like changing curtains - not because they were worn out, but "because you want a change".
"We think we produced an environment that was appropriate for the market's expectations when we opened in 1996, but now we want to come up with something that we think will be appropriate for 2007 and the next decade of operations."
The latest profit fall shows an 8 per cent fall in takings from Auckland's gaming machines, with $163 million coming in the half year to December.
New rules laying out the information that must be shown to people using machines had meant a lag in getting new games, said Davies, which may have played a part in the fall off in Auckland revenue.
New machines were now on the way, and management was also working on a new approach to customer service to complement the investment in a new gaming floor.
"Feedback is that we do a pretty good job in providing the experience in the way we service them. We aspire to do that better.
"We aspire to make the human component of their gaming experience fun and entertaining, as well as the product component."
This wasn't easy, since a lot of the jobs came along with a heavy "prescriptive element" of rules and regulations.
"We need to help people produce an entertaining experience within a highly regulated environment, and that's about providing people with the flexibility and the understanding of the objective that what they are there to do is to be part of that fun."
Davies rejected any suggestion that the core operations in Auckland had been neglected at expense of newer, more interesting projects.
"I don't think we have ever lost focus on the importance of Auckland's performance; I think sometimes there is a cycle in things.
"It's always arguable, isn't it, when it's time for significant change - should we have refurbished Auckland earlier? Hindsight is always marvellous, but I don't think so."
The programme of increasing the range of attractions on the Auckland site - restaurants, bars and the new five-star Sky City Grand Hotel - was very important and was largely completed now.
Davies is philosophical about the high-rolling VIP business, where Sky City competes with the world's casinos to bring in well-heeled gamblers.
Big rewards await, but the potential for big wins brings with it the risk of volatile results.
He said the recent losses would not mean any move away from kind of volatility that came with the VIP business.
"It contributes and has contributed in a satisfactory way over time. Clearly, the first half of this year was pretty disappointing, but it's a business where you're either in, or you're not. I'm not sure I'd agree that it was a hugely important part of what we do. It's there, it adds value - it has some negatives, as we've seen, but overall, we're comfortable to continue with it."
Davies told shareholders this week that the company had "a series of strict controls and procedures to manage its exposure to this type of play" and was "satisfied as to the risks involved in participation in this area of business."
"High-end table play" makes up less than 5 per cent of Sky City's total revenue stream.
AMP Capital Investors head of equities Guy Elliffe said the poor VIP results were the only real problem coming out of the half-year results from the Auckland operations.
As more VIP business was sought, more volatility was inevitable.
The odds weren't different for the high rollers, but the number of transactions was much lower - "not enough events for the luck to even out."
"With gambling machines, you've got people pulling the levers all day long, you've got a pretty high expectation of what the outcome is going to be. If you've got a few people going in there betting a few million bucks - if one or two of them are lucky, they can cause a bit of damage."
This was nothing specific to Sky City; major casinos worldwide had this same liability.
"From my point of view, I still think Auckland is the jewel in the crown."
Elliffe, who will not disclose how many shares AMP owns in Sky City, said he saw no need for Sky City to move away from its core Auckland gambling activities.
"It's a cash generator, and that's where the returns are. It's just an unbelievably attractive business. I just think it's a great asset; I think the returns will be fine over time. I really regard Auckland as the jewel and some of these other acquisitions as a little bit more problematic, to be honest."
When the sky fell in
While revealing poor half-year results last week, Sky City management reminded its shareholders that their investment in the company over the past decade had been a good one.
* An investment of $1000 in Sky City on the first day of listing, would, if all dividends and distributions had been reinvested would now be worth $6020, tax-paid.
* Sky City started with 2500 employees in Auckland and now employs more than 5000 people in Auckland, Hamilton, Queenstown, Adelaide, Darwin, and in 17 cinemas across New Zealand.
* Now operates at 22 sites in New Zealand and Australia - five casinos in Auckland, Hamilton, Queenstown, Adelaide and Darwin plus 17 cinemas in New Zealand.
* Sky City's market capitalisation has grown by almost four times, from $635 million at 30 June 1996 to $2.1 billion.
* The Auckland property accounts for two-thirds of the company's earnings. $40 million is being spent refurbishing the gaming area.
