Can Sun City shine again?
Sun City, originally the brainchild of Sol Kerzner, was revamped recently at a cost of R1bn and relaunched as a family-friendly place. But in the modern era life is not easy for the famed Pilanesberg resort
Sol Kerzner never doubted that Sun City would work. From the moment he saw the site, in a volcanic crater in the Pilanesberg, from the helicopter he was flying in, he knew it was the right spot.
“We flew around and finally we landed,” he says. “The architect was with me and I said we don’t have to look at the other two sites ... the hills, the valleys, I could foresee everything. I said put the lake there, the golf course around the lake. I saw it.”
From that day, during the height of apartheid in the mid-1970s, grew a legend that made SA (or technically, the Bophuthatswana homeland, where Sun City was located) globally famous — from its Million Dollar Golf Challenge to top-of-the-range boxing bouts and Miss World pageants.
During the 1980s, Sun City was all glitz, glamour and bright lights of a sort you couldn’t find elsewhere in SA. It was a playground for the elite in an era of repressive laws and enforced racial segregation. Back then in SA, gambling was illegal, movies were closed on Sundays, alcohol couldn’t be bought on a Sunday, and books and films deemed “politically charged” were banned.
It’s hoped Sun City’s makeover will allow it to capitalise on its repositioning as a family destination
But the “pleasure palace” — as Sun City was dubbed — was a place where all of this was possible. Though visited mostly by whites (who had far more money), it was often a mixed crowd. You could drink alcohol at any time, gamble to your heart’s content, and even watch adult movies.
Says Kerzner: “I instinctively thought if we provided the facilities which were unavailable in SA, and I always felt if you gave South Africans something that was high-quality and exciting, I never doubted Sun City would be successful.”
Today, Kerzner has long since left Sun International, the company he founded which held Sun City, and which is still listed on the JSE. These days, the 81-year-old lives in London and has built other global hotel groups, including the Atlantis resort in the Bahamas through Kersaf, as well as the One&Only brand of hotels.
Sun City seems a no-brainer now, but back in the 1970s, it was an untested venture. Kerzner’s vision was to replicate the glitz of the US resorts. “The shows we put on, the extravaganzas when we opened, there was nothing like that in SA, it was on a par with anything in Las Vegas,” he says.
Kerzner says the trick was to build a resort close enough to Johannesburg, and the big populations on the Reef.
In 1979, on the day Sun City opened, the numbers were huge. Kerzner says it was “far bigger than we expected”, and they had difficulty coping.
“We’d expected drawing perhaps a few thousand visitors on a weekend in addition to the folks staying there. As it turned out, the second weekend we had to close the doors (as) we had 15,000 people in the complex. I’d built it on the basis we could hold 3,000 people and we had to announce on the foghorn that we had to close the doors,” he says.
So they scaled up. “Everything was on a par with what they had in the US. We had the entertainment, a huge variety of restaurants and entertainment, discos, casinos. I think it was a combination of stuff and the place itself captured the imagination of the public ... the international exposure was huge. As a result, most people visiting SA from overseas were ending up in Sun City for a few days.” he says.
In the late 1970s, gambling was the windfall that built Sun City. This cash flow subsidised the building of the Palace of the Lost City too.
Those were the glory days, something Sun City traded on for years.
In recent years, the magic faded. Hotel occupancies were low, people were gambling elsewhere.
A combination of factors changed things: democracy in 1994 meant you didn’t have to drive to Sun City to gamble. “It ran a wonderful race for many years and then it became obsolete in many respects,” said Sun International chief operating officer Rob Collins, at its relaunch in December.
What it means:
Mushrooming of urban hotels and the legalisation of gambling have presented challenges
Overall, gaming revenue in SA has dropped. This means Sun International has been relying on alternative sources of income — accommodation at its hotels, as well as the hefty margins in food and beverages.
De Wet Schutte, equity analyst at Avior Research, says this shift was inevitable in post-apartheid SA.
“When casinos were legalised across the greater SA, post-1994, it meant places like Sun City lost some of their gambling exclusivity in that sense. In the old dispensation it was one of the very few places you could gamble and when gambling was legalised 40 casino licences were made available across SA, with large casinos starting to mushroom in the main urban centres.”
The big resorts — places like the Wild Coast Sun in what was then Transkei and is now the Eastern Cape — lost many gambling customers to urban centres. So they had to reinvent themselves.
“The economics behind big resorts are typically quite poor, because it’s difficult to make a return on these big resorts by only selling ice cream and cooldrinks to kids. You have to get the big gamblers there, because they spend the big money,” says Schutte.
Two months ago, Sun International unveiled a revamped Sun City – the product of five years of work and a R1bn makeover. Its old “Sun City Hotel” has been rebranded as the “Soho hotel” for example.
Graeme Stephens, Sun International CEO, says that by 2013, they realised they either had to fix it up, or consider alternatives — like selling it, or closing it.
“Ultimately, factoring in not only the financial considerations but the brand and employment considerations, we took the decision to invest over R1bn,” says Stephens.
It found the money by selling timeshare, as well as internal cash flow, so shareholders had to pay as little extra as possible.
So how has it changed?
Stephens says it now focuses on attracting families, “adrenaline seekers”, and the business and event market with facilities.
Perhaps the most important component of the upgrade, he says, is the R300m spent on revamping the Sun City Convention Centre, to position it for business and boost room occupancies during the week. In the evening, for example, you’ll now find the Valley of the Waves being rented out to large companies.
Its Vacation Club has been spruced up and average annual occupancy is now just under 80%. “And 80% of our members buy again into Sun City timeshare after their 10-year period ends,” says Stephens.
The bedrooms in the Cabanas and the new Soho hotel are fresher, with a dash of colour that makes them more contemporary. The Soho Hotel has night clubs, burlesque clubs and restaurants open 24 hours. Adult movies are no longer shown at the cinemas, though they are available to guests staying in the hotel.
On the gaming front, Sun City is targeting high-rollers from Asia, prepared to undertake long-haul flights to experience a unique resort.
It’s also playing off its historical association with golf. While the first Million Dollar Golf Challenge carried that amount as the purse, the Nedbank Golf Challenge last year made its debut as part of the European Tour, with a purse of more than R120m.
Stephens believes it’s working. Last month, the resort was fully booked. Day visitors queued at the gates, and the Valley of the Waves was packed.
“Globally we find that the brand ‘Sun City’ is much stronger and better known than Sun International,” he says.
But Schutte isn’t so sure this was a wise investment. “The economics don’t change — it requires people driving from the city out there to spend a lot of money. That’s difficult to achieve in a tough economy. So it remains to be seen if the refurbishment was money well spent,” he says.
This is especially since Sun City’s margins are relatively low compared with many other properties.
“They say the replacement value of the resort is close to R10bn,” he adds. “No-one is going to replace it for that kind of money. So, on the one hand, it suggests that it’s a unique, or even very valuable property, but on the other hand it suggests a high hurdle for making an acceptable return on capital.”
This is especially since gambling revenue is constrained anyway.
Consider the varying trajectories of the two JSE-listed leisure groups, Sun International and Tsogo Sun. Both make money from casinos and hotels, but while Sun International has resorts like Sun City and the Wild Coast, Tsogo holds urban casino hotels, like Montecasino.
The result: Sun International’s share price has fallen 2.8% over the past five years, while Tsogo’s has risen 54%.
“Urban hotels typically generate far better returns,” says Schutte. “Sun International has been a little hamstrung by the capital intensity of its resorts, where Tsogo is not.”
That’s not to say the hotel industry is in rude health either. Figures suggest a solid summer season in Cape Town, but in Gauteng hotel revenues are quite flat. Thanks to the weaker rand, however, the hotel sector is doing okay — even if it’s not shooting out the lights.
Stephens is hoping Sun City’s makeover will allow it to capitalise on its repositioning as a family destination — not just the mecca for sin.
Figures suggest it’s working. This past December the hotel was fully booked. Day visitors queued in cars, as did staying guests. People frolicked and swam in the Valley of the Waves.
But investors will be watching the occupancy rates for signs of a true turnaround.
The four hotels at Sun City have 1,310 rooms. Average occupancy has been creeping up: last year it was 67%, in 2015 it was 63%, and 64% in 2013 and 2014. So at least the trajectory is in the right direction.
But for Sun International, this may not be where the money is.
A report from Anchor Capital says the “wise investor” will follow Sun International to Menlyn Maine, the Pretoria-based hotel where Sun International “will unwrap their most generous gift to shareholders yet — the new Time Square hotel & casino”.
That Menlyn “super-complex” will be SA’s second-largest casino, which analysts say will contribute over R1bn in annual operating profit once it’s operational.
Says Anchor: “We estimate that (Menlyn) will add around R32 in intrinsic value per share – significant in the context of today’s share price of R85, which in turn we think is not discounting any of Menlyn Maine’s value contribution.”
This suggests that while Sun City still has a place in the future of the group, it’s no longer the big kahuna it once was. In the dark days of apartheid, its relevance was unquestioned as it provided a coveted product you couldn’t get elsewhere.
Kerzner took his children and grandchildren to see it recently, and stayed at the Palace. “They had a ball. People seemed happy to see me,” he says.
Who can blame them? His tenure coincided with the glory days, before Sun City had to fight for relevance. Its long-term future may not be assured, but the odds are looking better.