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A Site Selection Web Exclusive, April 2011
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End Game

Zappos.com brings a growing headquarters — and what some might
call a healthier brand of fun — to downtown Las Vegas.

ONLINE INSIDER
Zappos.com will move into the former City Hall in downtown Las Vegas (left), while city government will move into a new City Hall (right) by April 1, 2012.
City of Las Vegas

by Dean Barber
I

n his book "Delivering Happiness," Tony Hsieh, the young, energetic and imaginative CEO of the online clothing retailer Zappos.com, tells about the decision to move corporate headquarters out of his hometown of San Francisco. The high cost of living and culture were the primary reasons. "Working in a call center just wasn't something that people in the Bay Area wanted to do," Hsieh wrote in his book published last year.

In late 2003, the four-year-old company shortlisted its possible moves to Phoenix, Louisville, Portland, Des Moines, Sioux City, and Las Vegas. 

"In the end, we decided that Las Vegas would be the best move for the company," Hsieh wrote. "It wasn't the cheapest option for us, but we thought it would make our existing employees the happiest." (The Louisville area has welcomed distribution facility growth from the company in Shepherdsville.)

Happiness is a reoccurring theme at Zappos, an integral part of the corporate culture of a company that moved to the Las Vegas Valley in 2004 with 70 employees and now employs 1,200. In 2008, Zappos posted $1 billion in sales, and in 2009, the company revised its vision statement: "Zappos is about delivering happiness in the world."

But the story does not end there. In some ways, this is where it starts. Because of projected growth at Zappos and Hsieh's insistent pursuit of happiness in the Zappos culture, there will be yet another move for corporate headquarters.

The news of the deal broke on Nov. 29, 2010 after months of quiet negotiations: Zappos would move its corporate headquarters from Henderson, a neighboring town to Las Vegas, to the current City Hall site in downtown Las Vegas. The deal would include the current City Hall campus and nearby city-owned properties, comprising 17 acres (just under seven hectares) in all. On Dec.1, the city council gave its stamp of approval, accepting a $25-million offer by Resort Gaming Group (RGG) to buy the city-owned properties with the intent of developing it as the corporate campus for Zappos.

As part of the deal, the city will move into the new building, now under construction, by April 1, 2012, while Zappos will likely move into the old City Hall after extensive renovation in late 2012 or early 2013.

In a city known for gaming, this one is being proclaimed by Las Vegas Mayor Oscar B. Goodman as a "game changer."

Knowledgeable observers agree. With the infusion of creative-class new blood from Zappos, the betting is that downtown Las Vegas will become transformed into a vibrant traditional downtown where diverse businesses will be located. Right now, it cannot be described that way.

Says Scott Adams, chief urban redevelopment officer for city: "Building a traditional downtown can serve as a focal point for the diversification of our economy."

In announcing the deal alongside Hsieh, Mayor Goodman said, "Today is a transaction that is going to forever affect the social fabric of our community. The way we think about ourselves and our inner core will be different from this moment forward."

He continued, "There are certain watershed moments that a city may celebrate and consider while evaluating the historical perspective. This is one of them."

In a prepared statement, Andrew Donner, the CEO of RGG, echoed the sentiments of Mayor Goodman:"We believe this project will have more impact on downtown revitalization than any other development to date."

Zappos today employs about 1,200 people in Henderson. Company officials say by the time the move takes place, Zappos will have an estimated 2,000 employees, all of whom will be together in downtown Las Vegas.

Where People Want to Be

His book, his friends and press reports would indicate that Hsieh (pronounced "Shay") is very much a non-typical CEO running a non-typical company. In 1998, at the age of 24, Hsieh sold LinkExchange, the company he cofounded, to Microsoft for $265 million after two and a half years in business.

He then joined Zappos as an investor and advisor, eventually becoming CEO. After debuting as the highest-ranking newcomer in Fortune's annual "Best Companies to Work For" list in 2009, Zappos was acquired by Amazon.com in a deal valued at over $1.2 billion on the day of closing.

In his book, Hsieh identifies the inglorious start of his entrepreneurial journey as a nine-year-old: "My path began on a worm farm." (The worms escaped and no money was made.)

Since the worm farm days, Hsieh now finds himself at the helm of a company that he considers family. Company culture — encouraging employees to connect with others through "serendipitous interactions," both at the workplace and away from the workplace — remains a top priority.

"Our belief is that if we get the culture right, most of the other stuff — like delivering great customer service and building a long-term enduring brand and business — will be a natural byproduct of our culture," Hsieh said at the time of the City Hall move announcement.

Observers say it is precisely the Zappos corporate culture that could have far-reaching ramifications for downtown Las Vegas.

Michael Cornthwaite, the owner of the Downtown Cocktail Room who describes himself as a friend of Hsieh, says the Zappos CEO wants his company to have a transforming effect on the downtown, but in a humble way.

"Tony is going to be the primary catalyst in a massive change in the dynamic of Las Vegas, from being a sin city, debauchery mecca to being a tourist destination but also a respected business center," Cornthwaite said. "But he understands that a lot of ground work has been laid in the downtown over the past 10 years. Instead of him coming down here and taking over, he is being very inclusive and very smart about his approach in utilizing people who understand how to get things done down here."

Cornthwaite describes himself as a "downtown oracle" who knows how to navigate the politics of change and has provided counsel to Hsieh.

"It's not all about business and money and increasing the bottom line for him," Cornthwaite said. "A lot of it has to do with quality of life and happiness and community. I think he realized over time that he could have an impact on this area. I believe in him."

Indeed, because of the pending downtown move, the company has modified its brand. Formerly it was the "The Three Cs": clothing, customer service and company culture.

"Now we have added a fourth C: community," says Jamie Naughton, a top-ranking Zappos executive with the job title "Speaker of the House" who is in charge of the move downtown.

"This seemingly easy move to downtown has taken on a life of its own and it has become a purpose for us, which is to help revitalize a community in which we will all live and raise our family," she says. "We see the potential of the downtown. It started as a way to grow our culture. We really want to offer an environment in which you have the ability to work and play."

The fact that Las Vegas has spent much of its history focusing on how to maximize tourism and gaming has meant "not a whole lot of thought on how you create a city where people actually want to live," says Naughton.

That has been changing with recognition that gaming, while important, cannot be the cure-all. Indeed, for Vegas and its downtown to become a well-rounded better place to live and offer quality jobs, economic diversification is an absolute necessity.


After the Storm, Time to Transform

One could argue that Las Vegas was ravaged by the recent recession, more so than any other place in the United States. The median home price in the Las Vegas area has tumbled to $138,000 from $317,000 in 2006. Las Vegas again topped the foreclosure ranking in the first quarter of 2011 with 26,275 homes entering the process.

Moody's Analytics doesn't expect Las Vegas single-family-home prices to bottom until mid-2012. With thousands of homes headed to foreclosure, local economists say the economic storm is not over — that it will take at least three years for the market to absorb the excess homes.

"The local economy is better than it was a year ago, but it is far from good," says Jeremy Aguero, principal analyst with Las Vegas-based Applied Analysis. "We lead the nation in almost every category of economic instability, including unemployment, bankruptcies, foreclosures and housing price declines."

The bright spot is a substantial pickup in visitor metrics — improvements in tourist volume, spending and future bookings. But most residents understand that the opening of another mega-resort will not bring about needed change.

According to the 2011 Las Vegas Perspective, an annual report of the city's demographics, economic and cultural statistics, nearly 65 percent of Las Vegans feel that attracting non-gaming business is "very important" to the future of Las Vegas. More than 86 percent agreed that non-gaming businesses should be promoted.

And that, in a nutshell, is what Zappos represents.

"Zappos validates everything we have been doing to this point," says the city's Scott Adams. "It says that all this investment that we have made over the past decade was correct and has led to the end game, which is attracting business which will ultimately grow and diversify our economy."

Iain Vasey, who formerly worked for the City of Las Vegas and now heads business development for the Baton Rouge Area Chamber, says the Zappos deal confirms a correct policy toward downtown redevelopment, as envisioned by Mayor Goodman and city planners.

"It would have been so easy for them to keep expanding out into the desert, but they have refocused their energies into redevelopment instead of sprawling development, and it has paid off very well for them," Vasey says. "Zappos may be the biggest deal right now in the West."

Because of its cutting-edge technology and the creative class of mostly younger workers that it will bring to the downtown, Zappos stands in stark contrast to legacy downtown businesses.

"We very well may be looking at the first step of changing downtown Las Vegas forever," says Aguero.

John Restrepo, with Las Vegas-based RCG Economics, agrees that Zappos "will set a new tone for downtown development."

"The hope is that this will create more demand for urban housing and for restaurants and for stores in the downtown area. We can foresee Zappos attracting suppliers, vendors and allied companies," he says.

Serendipity Central

Indeed, press reports would suggest that Zappos CEO Hsieh is taking on an evangelist role, telling business friends about the benefits and the potential to be realized in the downtown.

In order to make the downtown a more attractive place for business investment and living, Hsieh has donated $2 million to the Smith Center for the Performing Arts, a planned multi-theater complex now under construction. The $475-million complex will offer a blend of performances by local arts groups, including the Las Vegas Philharmonic and Nevada Ballet Theatre, as well as first-run touring attractions. Upon its planned opening in early 2012, the facility will be the first regional performing arts center in the Las Vegas Valley.

Hsieh is also rattling off ideas for creating a community kitchen downtown, a company-sponsored K-12 charter school, a high-tech business incubator, and more housing downtown for Zappos employees.

"Our goal is not for our employees to just work downtown but also to have them want to live there, so that they are constantly feeding into that downtown economy," says Zappos exec Naughton. By living and working together, more of Hsieh's hoped-for "serendipitous interactions" will take place.

Economist Restrepo says the Zappos investment in Las Vegas demonstrates that the city has a serious business side to it, and should be considered as a viable place for doing business like Phoenix, Salt Lake City or Seattle.

"Yes, there is the Vegas where you can blow off steam as portrayed in the movie, 'The Hangover,' but then there is another Vegas, where serious business can get done, and where there are business advantages over other places," he says. "It's really a tale of two cities in many ways."


Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm in Red Oak, Texas — www.barberadvisors.com.


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