Japan the top prize, though Brazil seen a worthy contender

Brazil and Japan are two of the most hotly anticipated casino markets, but how do they stack up against one another and which country is the most appealing for international casino operators and investors?

The two nations have entwined cultural links, mainly due to mass migration throughout the 20th Century. In fact, Brazil is home to the world’s largest Japanese-descendant population outside Japan. One other thing Brazil and Japan have in common is that they both appear to be on the cusp of introducing legalized casino resorts after years of false starts and delays.

In Brazil, one reason for the lack of progress of late has been the political instability in the country after ex-president Dilma Rousseff was impeached 2016, while the incumbent, Michel Temer, was charged in September with obstruction of justice and racketeering. However, there are renewed hopes that the deadlock can finally be broken and legislation on casino resorts and other forms of gambling passed.

“The main challenge in Brazil is not about the will to pass legislation, it’s prioritizing gaming on the list of other political and governmental initiatives,” remarks Michael Soll, president of The Innovation Group.

In Japan too, the path to legal and regulated gambling has been a long and winding one. However, a significant step forward was taken when the parliament approved a bill to legalize casino gambling last December triggering a rush of activity amongst global casino operators keen to capture the prize. Then Prime Minister Shinzo Abe threw a spanner in the works, calling snap elections for October, triggering renewed uncertainty as to the fate and timing of the bill.

“That opens the door to further delays given the uncertainties associated with every parliamentary session,” Grant Govertsen of Union Gaming Securities Asia Ltd tells AGB. Abe appears to be on track to sweep the polls in Sunday’s election due to the implosion of the opposition party. If confirmed, this will give him a new mandate and keep the bill alive, though it’s unclear what the impact will be on the progress of the casino bill.
 

Economic rewards

In Brazil, as well as job creation and attracting tourist dollars, regulated and taxed gambling would go some way to remedying the country’s economic malaise (GDP slumped 3.8 percent in 2016). South America’s largest country, which has been described as a sleeping giant in terms of gambling, still has the potential to become one of the world’s largest casino resort markets if a ban on most forms of gambling – introduced in the 1940s – is finally lifted.

In terms of population, Brazil is the sixth-largest country in the world with around 209 million inhabitants. Approximately 180 million reside in cities. Yet there is no avoiding the vast chasm between rich and poor. According the World Bank’s latest figures in 2013, 9.7 million Brazilians were struggling to survive on $1.90 a day. And although Brazil emerged earlier this year from its longest-ever recession, a record 14 million (13.6 percent of the population) are currently unemployed, which means a large chunk of the country won’t have the means to gamble in casino resorts.

Instead, casino operators will be courting the millions of comfortably well off citizens and wealthy elite. Indeed, the rich keep getting richer in Brazil; the number millionaires rose 10.7 percent in 2016 to 164,500, according the ‘2017 World Wealth Report’. These individuals’ wealth swelled from US$3.7 trillion in 2015 to US$4.2 trillion in 2016.

Soll says that even after adjusting for the high proportion of Brazilian residents that “will not contribute meaningfully to the industry’s bottom line”, there is a “massive population of potential gamers” in the country. “Domestic tourism will be a substantial source of revenue for casinos in Brazil, especially in the early stages when the distribution is limited and residents will travel within their regions to see new properties. And international tourism growth, which can be fleeting in some gaming markets, can really benefit Brazil, which has very low international visitation currently relative to its size.”

Boosted by hosting the Olympics, Brazil attracted 6.6 million tourists last year, a 4.8 percent jump on 2015, but, as Soll remarks, this number could be far larger.  

Global powerhouse

In economic and tourism terms, Japan is world’s apart, welcoming 24 million visitors last year (four times as many as Brazil), while the country’s GDP per capita for 2016 was $47,607 (377 percent of the world’s average) compared with $10,826 in Brazil. Unemployment sits at just 2.8 percent. Despite Japan’s population of 127 million being significantly lower than that of Brazil, a much larger proportion of the nation will have the means to gamble in casinos. And much like Brazil, Japanese citizens also have a propensity to gamble, best illustrated by the national obsession with pachinko (a pinball-style game that pays out prizes in order to stay within the law). Players spent more 23 trillion yen in the country’s 10,000 pachinko parlors in 2015.

Some analysts suggest casino gaming could generate $30 billion a year in Japan, putting it on a par with Macau. These factors have generated interest among most of the world’s casino majors, with both MGM Resorts and Las Vegas Sands saying they may be prepared to invest as much as $10 billion in the country. Galaxy Entertainment; Melco Resorts & Entertainment; Hard Rock International; Genting Singapore and Wynn Resorts are just a few of the names openly pushing for a license to operate there.

In Brazil, the gambling profile and type of resort is expected to be different. Studies have shown that the market has the potential to generate about $6.3 billion in revenue, though the size of the individual IRs is likely to be smaller.

While potential gamblers from the US will be restricted to a certain degree by the fact Americans require a visa, the casino sector’s target overseas visitors are likely to be holidaymakers and business travellers from across Latin America. Furthermore, many Brazilians that currently travel to resorts in neighboring countries like Uruguay will probably choose instead to gamble in casinos in their home country.

A visitor magnet like Rio de Janeiro or the financial and business hub of Sao Paulo will be highly sought after prizes for international casino operators, though Steve Gallaway, managing partner at Global Market Advisors, doesn’t expect multibillion-dollar mega-resorts to be built anywhere in Brazil.

“I don’t think you are going to see someone build a $5 billion resort but I could see someone building a $500-700 million resort,” he says. “Brazil is such a large country that you have enough people of means where a local integrated resort would be very successful [but] I just don’t see it being a $5 billion resort. I’d be shocked if someone put in that much.”

MGM has expressed an interest in Brazil and in “large-scale integrated resorts”. Caesars Entertainment and LVS are also keeping an eye on developments. Rob Goldstein, president and chief operating officer of LVS, said: “We see what everybody else sees: It’s a large population base and a fascinating country.”

Needless to say, the fact that most forms of gambling are outlawed hasn’t prevented Brazilians from enjoying a flutter. The country’s gambling black market is estimated to be worth $6.1 billion a year. Around $3.7 billion is thought to be gambled on the popular illegal lottery, Jogo do Bicho (Animal Game), while illegal slot machines are ubiquitous. Locals pump $1.1 billion a year into these machines.

“That is another big issue,” says Gallaway. “There are hundreds of thousands of these slot machines, so before you pass a gaming law you would have to figure out what to do with these illegal machines. To legalize and tax them is probably your best bet because I don’t know how you get rid of that many illegal machines.”

Public opposition
In Japan, some of the main concerns involve public opposition, with the majority of Japanese still said to strongly oppose casinos on concern about problem gambling and crime. With one eye on public opinion, some of the more restrictive legislative models being suggested have lead to some concern.

The government may opt to follow the Singapore model, which charges locals S$100 to enter either of the city-state’s two casinos. More worryingly would be to restrict gaming floors to the exact same limit as Singapore (15,000 square meters) when the populations of cities like Tokyo and Osaka dwarf Singapore. Both measures would put a hefty dent in those projected revenue figures and could deter investors despite the government’s aim to attract 60 million overseas visitors by 2030, a rise of 150 percent from 2016.

In summary, both Brazil and Japan are clearly huge, attractive casino markets on paper, though Soll stresses that the “economies and demographic characteristics” of both countries are very distinct. He adds: “We see a much higher distribution of gaming properties arriving on the scene in Brazil versus Japan, but with lower revenue potential per property.” Notwithstanding Brazil’s economic woes and political instability, it would appear the ‘Land of the Rising Sun’ is shaping up to be a safer bet providing the Singapore template is avoided. “It is a very robust market in Japan,” Gallaway says. “There is tons of gaming demand, there is tons of hotel demand and there is also untapped convention and meeting demand.

“So I would much rather invest in Japan than Brazil. You are also dealing with a very stable government and a stable economy where public gaming companies are going to feel comfortable planning for the long term because they will feel their money and investment is more secure in Japan.” With some suggestions that the first Japanese resort won’t realistically open until 2023 at the earliest, could Brazil steal Japan’s thunder, though? “I would guess the law passes first in Japan,” says Gallaway, “but I believe if Brazil happens in the next 24 months it could potentially have casinos open more quickly.”