How Would Singapore IR & Casinos Compete For Business?

Posted: October 26, 2009 in Uncategorized

Contributed by: Felix Ling (Senior Partner of Platform Asia).  26th Oct 2009

Magazine.Beijing

The Singapore IRs are categorized into two different packages in accordance with their respective strengths, namely, the Marina Bay Sands (MBS) will rely on their business convention theme as key driver for its casino –resort at the Marina Bay area. On the contrary the Resort World Sentosa (by Genting) will heavily rely on its strength of theme park experience as competitive edge.

So is it true that both the IRs have already carved out their unique competitive advantage for the IR mega resorts and hence, targeting their focused markets, sit back to enjoy the fruits of investment?

The answer to that question is not exactly the case.

Broad-based Markets

The Singapore IRs are positioning themselves first of all, for the broad-based markets as discussed below, followed by service-based markets that the IR operators have to compete head-on to “earn” their value-added market shares.

Broad-based markets are essentially the readily catchment pool that Singapore and Southeast Asian countries have been tapping and remain a potential growth pipeline. However, these broad-based market segments are harder to exploit for greater value-added services and the averaged propensity of spending though will increase but not at an exponential rate. The characteristics of broad-based markets are stability of supplies, driven by value-for money offers, product trial basis, lack of loyalty/stickiness, seasonal cycles, etc.

IR’s broad-based markets are further categorized into the following segments:

(1)            The general tourism traffic into Southeast Asia.

(2)            Asian convention business.

(3)            General business travelers into Southeast Asia.

(4)            Singaporean locals.

Marina Bay Sands (MBS) will comfortably tap onto the Asian Convention Business broad segment when its convention facilities are into high gear but, it is likely that Resort World Sentosa (RWS) will offer lower than premium pricing to take some of MBS market share. It should be noted that great majority of mid to large scale convention network and trade fair events concentrate in North America and Western Europe. It is estimated that only 10 – 15% of such big events/platforms are in Asia and mostly in East Asian region.

MBS will have to drive hard to divert some of the larger convention events from China, Japan, Korea and possibly Taiwan to Marina Bay Sands.

On the other side of the arena RWS will happily tap onto the general tourism traffic already coming to Singapore with potential increase in volume. The currently top 5 tourism traffic to Singapore are, China, Indonesia, Malaysia, Australia and India. However the real challenge is to leverage the new IR tourism landscape for growth pipelines that otherwise not been successfully tapped in the past. The most crucial regions outside Southeast Asia are those with sustained GDP growth & high income East Asian countries (Northern China, Japan, Korea, Taiwan, Hong Kong), Middle-east and western India.

Without successfully drawing in the growth pipelines beyond the current tourism traffic origins, it is a tough challenge to achieve 17 million tourists target set for 2015. Also one of the key factors of the equation is length of stay and expense level.

MBS will be a more attractive location for Asian business travelers who are otherwise dispersed to the current Singapore 5-star hotels. MBS also has the advantage to under-cut hospitality prices with more wholesome and entertaining (as well as incentive) packages. Cannibalization of business will happen for sure, in the 5-star hospitality arena especially so during the lull period. So Orchard Road, brace yourself for the challenge. The only hope to prevent this will be to hope for MBS be highly successful in conventions and trade fairs that fill up larger number of days of a year, thereby allowing adequate “spillover” outside the Marina Bay. Do not forget that Sentosa will also rob away some business and convention goers.

Singaporean locals’ propensity of spending is largely on mid-low end consumer goods and value for money purchase. The reason is that most locals’ expendable income has been heavily (& happily) locked in on housing mortgage and aspiration to own a car. Spending on large credit behavior in Asian countries is generally far from the North America syndrome. Saving rates remain relatively high on the list of priority for Singaporean locals.

And yet, Singaporean locals may end up “playing” a significant role in contributing to at least up to 45% of total casino revenue for the two IRs. Whether this scenario will be a comfortable factor to Singapore authority can only be gauged when the script is being rolled out. It should be noted that there isn’t a casino in the world that survive well based on heavy reliance on foreign visitors’ contribution to its revenue. The initial opening game is clear-cut as the top management of Las Vegas Sands already mentioned that 75 – 80% of MBS’s total revenue would come from the casino floor. There will be not much a deviation from RWS when the operators are operating with high-cost structure and long gestation of return-on-investment as in the case of the Integrated Resorts. And the broad-based markets in Asia regions remain highly price sensitive.

Service-based Markets

As discussed for the broad-based markets Singapore IRs need to open up new growth pipelines beyond the traditional tourism traffic and also to build upon strengths of convention services & incentives especially, in order to gather good returns vis-à-vis the general characteristics of broad-based markets in and around the regions. One thing must be born in mind for Singapore IR, is that it is never a Las Vegas per se (similar concept but truly lack of critical mass) and definitely not a Macau model either. The Singapore equation of the IR has taken into great consideration of the social-economic impact as well as potential trade-offs.

So if the two IR operators were to look forward to long term sustainability and greater EBITDA margins (which are the same objectives of investors and creditors) amid the high-cost investment and operating structure, MBS and RWS will have to look closely at driving the service-based markets besides the readily available broad-based markets.

The characteristics of IR Service-based markets are,

(1)            Detailed market segmentation is a requirement.

(2)            Investing in customer-centric systems & processes and hence, achieve affiliation & stickiness.

(3)            Excellence in customer management with integrated systems for gaming & non-gaming cross-over.

(4)            Consistent service delivery.

(5)            Conversion & repeat cycle (especially for gaming revenue).

(6)            Clusters of premium service distribution channels.

The derived outcome of effectively executed service-based marketing will be,

l         Increased in per capita gaming (& non-gaming) budget flow into Singapore IR.

l         Improving EBITDA margins, especially on casino revenue.

l         Improved capability to develop growth pipelines from mid-high income East Asian countries (Northern China, Japan, Korea, Taiwan), western part of India and possibly the Middle-east.

VIP Casino Gaming

The Asian VIP gaming is at large a distribution channel driven market and it is also a service-based market.

The lower gaming tax is a cost factor but it is easily replaced by fast escalating Junket commission. The equation is rather simple here, due to player/customer acquisition costs and potentially huge credit risk, typically junket commission will be charged between 45% – 50% (based on long-term theoretical win) as in the case of Macau with extremely high turnover of non-negotiable chips in play in order to make it barely sustainable. In Singapore scenario, with relatively much lower turnover as compared to Macau VIP gaming as well as influence of regulatory control and credit risk as well, potentially junket commission level can be pushed to 63% – 67% of win (gross). After gaming tax casino will be left with about 23% of win (gross). Coupled with anticipated lower volume of non-negotiable chips turnover it is a challenge for casino to cope. The irony of the Singapore IR casinos is the same as Macau, the higher the proportion of VIP gaming as a total of casino gross revenue, the impact on its EBITDA margins will be worse. Macau stands at an average of 13% of overall industry-wide EBITDA margins. Singapore IR remains on very high capital investment and financial leverage to start with.

With the IR casinos to focus on service-based markets it opens the opportunities to develop a wider spread of VIP gaming (high-roller) supplies coming from the identified growth pipelines (East Asia, Middle East & Western India) instead of digging at the bottom of the barrel. With the development of new direct premium and junket players from these growth pipelines with the combination of existing VIP market in Southeast Asia will serve to strengthen otherwise a disadvantaged VIP gaming platform of Singapore IR. In other words, IR casinos should try to leverage on the low VIP gaming tax regime for service-based marketing, developing the new growth pipelines.

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