Macau’s challenge: Do policy-driven changes make for a successful market?

At this year’s Macau Gaming Show, experts were called upon to ponder whether Macau, the world’s largest gambling hub, can follow the example of Las Vegas and transform itself into an entertainment capital for the mass market.

Views varied, but the one common thread was that it was going to be a long and painful transition. While Las Vegas revenue crumbled over a period of years following the financial crash of 2007, the Macau market has fallen off a cliff in little over a year largely as a result of a government policy decision in neighbouring China.

That leaves the market with a dilemma. How to change and adapt to a “new normal” when you are not necessarily responding to the changing demands of the market, or customer preferences. The biggest source of visitor arrivals is still mainland China and the proximity to the world’s second-largest economy is still seen as Macau’s biggest asset. Few also believe the Chinese desire to gamble has gone away.

“A lot of the actions the operators have take have been driven by government policy and not by market demand,” said Sudhir Kale founder of Gameplan Consultants and a former adviser to Sands China. “We need to leave the market to run its own course because by this continued pandering to non-gaming we are creating an emperor with no clothes type of scenario.”

Kale said in his opinion the future of Macau is still gaming and the current investment in non-gaming facilities is being driven by the government and not market demand.

The market in Las Vegas dropped about 20 percent over a couple of years following the 2007 financial crisis, which became known as the Great Recession. Whereas in Macau the crash has been precipitous. The market slipped 2.6 percent in 2014 from its 2013 high of $45.1 billion and is down almost 36 percent year-to-date.

Las Vegas has been held up as a shining example of a city that was able to rebound and reinvent itself away from its pure gambling roots. The city obtained just 37 percent of revenue from gaming in 2013, down from 57 percent in 1990.

Currently in Macau, non-gaming activities only account for about 10 percent of total revenue showing a much greater reliance on casinos than Las Vegas even at its peak.

“Visitation in Macau is only down about 3 percent. Losing that 3 percent has cost the market about a 40 percent loss in GGR,” said Steve Rittvo, chairman of the Innovation Group. “In Las Vegas, the decline was across all market segments and during the downturn the VIP sector held up. Macau has seen a small decline in mass GGR, but a very large decline in VIP. It’s the concentration that makes the difference between the two cities.”

“Right now Macau is not successful in reaching out to the non-gamer and that’s something that needs to be addressed,” he added, pointing out that it was an evolution that happened over 20 years in the U.S.

Although Las Vegas revenues and visitation have recovered to their pre-crash levels, casino revenue has still not fully recovered. Growth is being led by the food and beverage and nightclub sectors, with seven of the world’s top 10 most profitable nightclubs resident in the city.

“Las Vegas has not been a gaming led recovery. The customer has decided to spend dollars very differently than in 2007,” said Chris Jones, managing director and head of North American research at Union Gaming. “The shining star has been F&B. I don’t think Macau has any chance of having this kind of F&B growth over the new few years.”

In fact a walk through some of Macau’s casinos shows the mass gaming floors are still well populated, whatever the time of day, though the sprawling luxury shopping malls and restaurants seem largely deserted.

The average visitation to Las Vegas is about 1.4 nights, while to Macau it’s 0.3, highlighting a heavy reliance on daytrippers crossing the border to gamble. There’s also a different mindset among the gambling population, with most in Las Vegas deciding to have a flutter as part of their general entertainment.

In Macau, the gambling is seen as a serious investment.

Although Macau is shifting towards the mass market consumer, taking that shift one step further to reduce the reliance on gambling in the revenue mix may be a tough call.

The number of hotel rooms in Macau is set to expand to 40,800 by 2017 from 30,000 at the end of 3Q as new properties open on the Cotai strip, according to Deutsche Bank research. All boast a greater array of non-gaming facilities and retail space. However, they remain mostly high-end properties.

“Macau can transform itself but it’s going to take time, it’s a long-term play,” Rittvo said.

“Repositioning is not easy. I would love to see an outlet mall, a proper outlet mall. It would knock them dead. It’s a tremendous opportunity. There is retail, but it’s all high end. We need to service middle China with middle class retail.”

Many panelists spoke of the need for Macau to step up its branding, marketing and analysis of the market. Las Vegas has managed to establish a very clear brand identity, though most agree Macau so far has failed to do so. Creating that identity will be a crucial step before it can market to a broader visitor base.

“Not enough attention was paid to player retention and customer preferences. Even in the boom times, the return visit was not great,” Kale said. “The loyalty programs leave a lot to be desired.”

Panelists also spoke of Macau’s transport infrastructure problems, with many projects, including the light rail transit system and a long-awaited bridge linking Hong Kong, Zhuhai and Macau facing continuing delays. The Hong Kong government this week announced the bridge will meet the end 2016 deadline and will take another year to complete.

There is also a further question mark over the profitability of the non-gaming consumer. While the mass market customer generates about four times the margin of the VIP player, profit on the non-gaming side has been low.

In a recent commentary, Fitch Ratings director Alex Bumazhny pointed to the impact of the differing tax rates. Macau’s 39 percent tax rate gives less of an incentive to market to the mass base, compared with Nevada’s 7 percent.

 All else being equal, a Las Vegas operator can reinvest an additional 32 percent of the player’s theoretical win into the player in form of comps relative to Macau without sacrificing margin. “A customer that may look barely profitable in Macau is a lot more attractive to a Las Vegas casino,” he wrote.