Asia’s Las Vegas… Macau Is Taking the Long & Winding Road

Posted: June 16, 2009 in Uncategorized

Asia’s Las Vegas …  

Macau Is Taking the Long & Winding Road  

Contributed by:  M. H.    

 June 16, 2009      Direction

The Professional Ground posted this article specially contributed by M. H. (an experienced practitioner in Asian’s gaming) on Macau’s horizon at the moment while many analysts are getting excited about Genting’s potential direct involvement in Macau through buying of USD100m worth of stakes in MGM.  But what is Macau’s big picture?  Let read what M. H. has to say…

Macau remains the hub of Asian gaming has been firmly acknowledged by the industry.  It has the key elements that support Macau’s claims, namely

(1)          Volume.  The mass and VIP customer market segments are embedded in the hinterland of greater China region.

(2)          Gross gaming revenue.  Macau has overtaken Las Vegas in gross gaming revenue at USD11b per annum. This trend is likely to be maintained.

(3)          Industry Cluster.  Macau has built a huge cluster of gaming and entertainment providers in a single location – all in the 26 sq. km territory. It’s so convenient. Coupled with that, Macau has the world’s strongest casino distribution channel – Junket operation.

(4)          Cash & Credit.  Relatively speaking, there is no short of cash transactions and credit facilities built around the territory, via diversified money channels especially from mainland China.   While credit is like oxigen to fire, it is at the same time a beast!

 Notwithstanding that the key winning elements are well positioned for Macau, the territory has its critical factors still not within its control… they are,

(a)          Macau is heavily relying on China’s FIT (Free & Independent Travels) policy. The policy functions simply like a water tap. Since October 2005 the Chinese central government has been ‘rationing’ the FIT supplies to Macau, by various degrees of restrictions imposed on traveling to Macau. Such restriction has proven to be an effective means and powerful control that will remain as a long-term lever. Simply, Macau will NEVER return to its good old days of unrestricted free flow supply of gamblers from China. To the central government, this is ‘managed market economy’. 

(b)          Macau’s strongest element has become its transformation roadblock. The Junket mode of distribution (including room-operator business model) has been in Macau for more than 40 years. The system and its stakeholders have become so intertwined that prevents any renewal to take place. VIP gaming gross revenue today still account for 65% of Macau’s total top-line volume. If you were to realize that the industry’s averaged EBITDA margin has dropped to about 12.5% then you would understand why heavily invested casino operators are trapped. It clearly shows that the mass gaming market’s gross revenue and market share are not big enough to off-set the extreme low margins of VIP gaming and volatility.   Lots of churning in business using credit and side-betting but is bad for the casinos.

(c)          The current product & service offering does not help to develop the jewel of the crown – truly premium customer segment that gives casino-resorts the greatest margins.  Albeit without the rip-off from the junkets.  Macau has channeled too much of its foreign direct investment on infrastructure building and hardware alone. Simply, Macau has yet to provide the truly ‘premium products & services’ which connect closely with the concept of lifestyle and differentiation. In Macau, literary every gaming provider offers the same things to everybody… The software aspect of premium standards is trailing far behind. If this critical factor is not being corrected, Macau will surely miss the most lucrative and steadily growing premium market segment in China, in the years to come.  This is a challenge in which the current junket model would not achieve.

(d)          Time to revert and transform Macau gaming market share.  The light at the end of the tunnel would be a simple equation,

                                         60% Mass Gaming market share    :    40% VIP/Junket market share

When that logical split of market share is achieved coupled with volume operation, Macau gaming industry will witness the state of profit optimization and multiplier effect of combination of  non-gaming hospitality growth pipelines.

The big question is, can Macau breakaway from its earlier success business model (but unsustainable) and bold to make the switch?

Macau risks missing its true premium Chinese market

Macau risks missing its true premium Chinese market

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