It was a clearly a gamble, the move into Macau made by Las Vegas Sands. The company made an initial wager with the Sands Macao and then double- and tripled-down on the Cotai Strip. The future of the entire company was at stake.
It quickly paid off, however, when Sands Macao opened next to the ferry terminal and was inundated by business. The construction costs were paid off in less than a year, and planning was under way for the Venetian, the first development of the company’s extensive Cotai Strip footprint.
When completed, the Venetian took time to ramp up. The property was built for the mass market, and even though it controlled a sizable portion of the all-important VIP groups, the mass market was growing too slowly to immediately call the Venetian an unqualified success.
And the global economic downturn hit and the Chinese government imposed regulations to slow the growth of the casino industry in Macau. While recent relaxations of those restrictions have helped to revive the Macau market, the future is uncertain.
Betting the Farm
Las Vegas Sands COO Michael Leven says that the initial wager was bold, so it’s not surprising that there have been bumps in the road.
“The bet we made in Macau, to use gambling terms, was that we could change Macau from a strictly gambling town to a place where you could go for leisure tourism and MICE business, as well as gaming,” said Leven. “And Macau has made some progress and made some of the commitments to change, as has Beijing.
“Our investments in Macau in Parcels 5 and 6 and beyond, are all designed to maximize that. But we need cooperation from the government. Now we’re dealing with restricted tables and things like that which may change the nature of our growth patterns. It’s not as predictable as other places. We are very profitable, but it’s not easy. You’re not in control of the long-term growth the same way you are in control of it somewhere else.”
Steve Jacobs, the president of Sands China, was brought in last year to restructure the business in Macau so it runs more efficiently and effectively. He says the growth of the mass market has been encouraging.
“It’s paying off,” he says. “Each year we do slightly better. To us, the tipping point comes when you can actually get the mass market that’s coming in on day trips and give them a place to stay. Right now the marketplace runs almost at capacity during the weekdays, and absolutely at capacity at the weekends. So there isn’t the ability right now to have that mass market player come in and actually take a one-time trip and make it a four-day stay as opposed to an in-and-out, same-day. I think it does a couple of things: It enables the mass market that comes to game for the entertainment. It also allows you to pull more families and a larger, diversified segment in to enjoy what Macau has to offer.”
Maybe the most significant-but little known-initiative instituted by Jacobs is a leveling of the VIP commission rate with Melco Crown, which owns City of Dreams, across the street from the Venetian. The move allows the two integrated resorts to compete on a level playing field.
“The market when I came aboard was about 1.35 percent,” says Jacobs. “We lowered it to 1.25 and agreed that on Cotai, that would be the rate. We lost a couple of junkets, but in about 60 to 90 days, they came back. What we found and what we proved through this experiment is if the brand is strong enough-if there’s enough adhesion between the products and the services-the guests and the high-rolling VIPs like to play where they feel lucky and where they call home. It certainly benefitted us and City of Dreams. We continue to hold at that rate, even though the rates downtown now are at 1.4, 1.45, 1.5-which makes no sense to me at all. None. That being said, I think as long as we continue to develop product and experience ahead of just pure commission, we’ll be fine.”
The VIP operators have been under greater scrutiny in the past few months for a variety of reasons. Allegations of connections with organized crime have increased and some U.S. jurisdictions are taking a closer look at the arrangements. Leven says the company has always been careful about their business partners.
“When it comes to the junket business around the world, Macau is a different kind of place,” Leven admits. “Even when you investigate, it’s difficult to discover everything that is there. But we’ve never had any problems that we can identify with any of the operators we are currently working with.”
Leven says that the company takes its lead from Chairman Sheldon Adelson in this regard.
“This is a company that values integrity first and foremost,” he says. “Sheldon is the best. This is my 50th year of work. I have never worked for an individual that has his ethical standards. He will not cross the line. He will not even come close to the line. If he makes a mistake-like any of us can-it’s certainly not by intent. We want to run a compliant operation and will do everything in our control to do that.”
The launch of Sands China as a publicly traded company featuring a minority percentage of the Macau operations of Las Vegas Sands was a milestone for the company, and Jacobs explains how it impacted his operations.
“It’s changed everything and it’s changed nothing,” he says. “Clearly as a stand-alone public entity we have certain rules of governance and certain ways that we have to run the business per the Hong Kong stock exchange. In terms of day in and day out: No. We locked the strategy in place back in the June/July timeframe, and now we’re executing. In terms of the board, we were very fortunate to get three very qualified independent directors that have been very helpful and helping us expand our understanding of markets in which we play and how we might want to go about some different strategies. But it’s not a material change.”
The retail operations for the Sands China Cotai operations have struggled. Jacobs says he sees improvement over the past six months.
“Last year was a bad year globally for retail,” he says. “We’re not an exception. If you look at our numbers from September, month over month, the gains we’ve had have been quite significant. If you look in the Hong Kong market, you can see that the retail now in 2010 is largely back. They’re now back in the range of 4.5, 5 cap rates, which, if you’d asked me a year ago, I would’ve said would have been a 2012 event, not a 2010 event.”
But even with recovering retail, the new hotels scheduled to open in 2011 will add around 800,000 additional square feet to the more than 1 million square feet in the Venetian and Four Seasons. Jacobs says he expects that shoppers will migrate back and forth and that Macau has an advantage at least equal to Hong Kong when it comes to shoppers.
“One: We don’t have a luxury tax, which is one of the huge benefits that Hong Kong has,” he says. “Two: It is quite likely this year that we will surpass Hong Kong in total visitors. Three: If you look at the socioeconomic demographics of the people going into Hong Kong versus Macau, there are much larger wallets and a much higher caliber of potential shopper coming in. To get the shopping to really take off in the luxury retail even more so than it is today-and it is quite strong in 2010; the first quarter has been quite good-you’ve got to get them to stay and you’ve got to get more families to come in. Every time we get a family to stay, we actually get a much higher share of wallet and retail than when just the gamer comes in alone.”
Last year, LV Sands sought to sell the shopping areas on Cotai and went as far as soliciting bids. None were acceptable, says Jacobs.
“We got qualified offers-all cash offers,” he points out. “The cap rates weren’t what we wanted. They were in the 7.5-8 range. Realistically, for that quality of an asset, you should be in the 4.5, 5, 6 range. The asset’s only going to go one direction, and that’s up. Our sales per square foot continue to improve, as we continue to grow month over month. I wouldn’t expect anything on that in 2010, but I would expect management to be aware of the impact, because it’s multibillion-dollar monetization of that when you sell it.”
Another differentiator for the properties of the Cotai Strip has been entertainment. Jacobs says it’s a key element of the company’s strategy.
“The Cotai Arena (at the Venetian) is firing on all cylinders,” he says. “We now have three to four shows a month. The last time I looked, we were about No. 70 in the world in terms of entertainment venues. We’re the only ones listed in the top 100 in all of Asia. That will only continue to grow as we get more rooms for people who come from afar.”
Leven says he’s happy with the turnaround in Macau, despite the difficult market.
“I’m very pleased with the direction Macau is going in,” he says. “Our stock price reflects a lot of Macau’s strength. Macau is always going to be a challenge-working in the local marketplace, working with the government, trying to figure out what the future’s like, trying to deal with things that aren’t in writing yet. But overall, there is more good news than bad these days coming out of Macau.”