*By Dave Rittvo
Matching the size of the resort to market opportunities and appealing to the millennial generation have emerged as two key themes when it comes to integrated resort design.
It has become especially relevant in Asia, where changing regulations and the decrease in the importance of the VIP sector are having a major impact on markets around the region.
Development opportunities in Asia are shifting towards smaller, right-sized “integrated resorts” that might focus on entertainment offerings rather than large convention and meeting spaces as its anchors.
There is no doubt that if Japan passes legislation to allow for integrated resorts in the major cities, the developments could be the single largest IR’s in the world. Outside of that opportunity and possibly a couple of other city center IR’s where gaming is currently illegal, the next IR development opportunities will have to be smaller and more nimble.
Some of the emerging markets that could capitalize on this opportunity include Cambodia, Laos, Myanmar, Philippines (Outside of Manila), and Vietnam, should the government change its minimum investment requirements.
To explore those markets, we believe there will need to be discussions and efforts to align the economic and social impact goals of the host country with the expected investment and operational returns of the developer and operator.
As we, The Innovation Group, continue to explore this market, we are paying attention to the questions and hope to provide some answers through this article.
Government Goals balanced with ROIC
One of the main inhibitors to creating this size and style of developments is the balance between the needs of the jurisdiction’s government and investment return hurdles for the developer. Pragmatically, governments would like to extract the highest positive economic and social impacts to allow gaming, which is usually in the form of high minimum investment requirements.
Developers and investors typically want to create an IR that will provide a lasting experience for the guest while driving positive returns. In some markets, these dynamics are imbalanced. As Tom Wucherer, CEO of YWS Design and Development, an internationally recognized casino and resort design firm, points out: “The challenge with throwing out a minimum threshold is that one of the biggest stakeholders is the local government, meaning you end up with a stipulation for a minimum spend or tax generation, without a balance established to create the best development.”
The most notable example is Vietnam, where the government requires $4 billion of minimum investment, with an effective gaming tax rate of 35 percent and prohibits locals from gaming. Should the government consider reducing the capital investment and adjusting the tax rate, it could start to see the benefits of increased opportunities.
A smaller and more nimble IR located in the designated development areas could unburden the current existing operators and allow developments in the other areas to begin. While the overall capital investment might decrease, the ongoing economic and business impacts would far outweigh the currently stalled development situation.
The key factor with any of these developments is a gaming tax rate that is conducive to development. The Innovation Group has looked at multiple markets in North and Southeast Asia and estimates the development size for emerging markets with a competitive tax rate should be between $350 and $750 million dollars. This would allow for a development that will stimulate the positive economic impacts for the government coupled with positive returns for the investor.
IR Development Evolution
The search for new viable gaming markets paired with the changing trends in developed gaming markets has led to an evolution of the IR. The Innovation Group chairman, Steve Rittvo coined the term “IR 2.0” to describe the original IR’s of Macau’s Cotai Strip as well as Singaporean IR’s.
During a recent panel at G2E Asia, Rittvo explained that these developments represented an evolution from the original IR’s of Las Vegas and Atlantic City. “While some of the original Integrated Resorts stemmed from developments that catered to the convention market, IR 2.0 developments are positioned to focus on both gaming and convention segments,” he said.
IR 2.0 properties also cater to a different gaming customer—VIP gamers. This relative reliance on VIP gaming at these properties has been evident as VIP revenue has broadly continued its decline over the past several years.
In turn, there has been a development to “IR 3.0” properties. “Gaming still represents the majority of revenue at these properties,” Rittvo said. “However, with features like themed rides and water parks, they aim to increase non-gaming revenue.”
“These resorts are primarily positioned to serve premium mass gamers, mass gamers, and tourists,” Rittvo said. Examples of IR 3.0 developments include Melco Entertainment’s Studio City in Macau, the Entertainment City IR’s in the Philippines, and Mohegan Sun’s planned Inspire Resort in Incheon, South Korea.
As for the future of IR’s, there will likely be an evolution in both site selection and business. Rittvo describes the next iteration of IR’s as “IR 3.1” developments. “While most Integrated Resorts developed over the past several decades can be thought of as ‘casinos with resorts,’ IR 3.1 properties can be thought of as ‘resorts with casinos,” he said.
In these developments, the footprint of gaming areas relative to the overall building program continues to get smaller. These IR’s are positioned to serve “yet another new mix of customers.” The customer segments these developments are targeting include the emerging Chinese middle-class consumer as well as VIP gamers. These properties are located in resort areas such as the Gold Coast in Australia, where the local communities are interested in widespread increases in general tourism rather than solely gaming-induced increases. “These resorts are not looking to replace Macau for VIP gamers,” Rittvo explained. Rather, “IR 3.1 properties are aiming to be an alternative to Macau where a VIP player can take his or her family.”
Design for different interactions within the IR space
As 3.0 and 3.1 IR’s are being considered in emerging markets, designing the spaces will be critically important to make sure the smaller footprint and budget is deployed to the best of its ability. As new segments of gamers enter the market, mainly the millennials, now the largest age cohort in the world, the IR’s in the future will have to adapt. Interestingly, millennials are coming to current IR’s in the United States with similar budgets to the older-aged market segments.
The difference is that millennials are spending in vastly different ways. The majority of their budgets are going to restaurants, bars, and nightclubs with a small portion being reserved for table gaming. The jury is still out on whether the established spending patterns of US-based millennials will coincide with those of Asian millennials, but the intellectual and social gap between the two continues to become smaller and smaller.
To tap into these changing spending patterns, Wucherer says there are five key elements to the next iteration of IR - hospitality, gaming, retail, entertainment, and dining. “What it needs to create enough synergy and a threshold of activity to be self-sustaining changes in every market,” he said. “There’s a combination of those five elements that need to be applied to each of them, but each is different depending on the setting and depending on what the market is, what your desired public customer is, and what your brand position will be to support that.”
The next development paradigm should occur in the next two to five years in Asia. Except the large, city center markets (Japan, Thailand and Taiwan) there will be a shift towards smaller integrated resorts that cater to mass and premium mass market gamers that will most likely spend more on nongaming amenities. It will be important to understand the development goals of these styled resorts to balance local government goals with the developers.
*David Rittvo is the Executive Vice President for The Innovation Group and leads the international practice for the company from the New York Office. David’s focus is on the emerging markets in Asia and Europe, concentrating on business development, project management and strategic advisement for TIG clients. Innovation group has been involved in global casino and gaming consultancy for the past 30 years.
Asia Gaming Brief is a news and intelligence service providing up to date market information for worldwide executives on relevant gaming issues in Asia.
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