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The Macau Problem

As the slump continues in the world's largest gaming market, casinos look beyond gaming-and beyond Macau itself-for answers

The Macau Problem

“Last year, I interviewed a (Chinese) billionaire at a six-star hotel in Dubai. Despite the splendor of the hotel, the woman looked depressed and glum. When I asked her why, she told me that there were ‘too many Chinese around.’”
Shaun Rein, founder and managing director, China Market Research Group

Musing last month for the benefit of the Hong Kong Economic Times, John Au, director of business development for casino giant Galaxy Entertainment Group, wondered:

“Do the customers already find Macau boring?”

This was a week or so after July’s gaming revenue numbers came out showing the world’s largest casino market in year-on-year decline for the 14th straight month. It was the sixth consecutive month of a fall-off in the triple digits.

A US$2.8 billion expansion of the company’s Galaxy Macau flagship had been open about nine weeks at that point—the first installment of more than $20 billion in new casino hotel construction on the neighboring island of Taipa in the resort district known as Cotai, aimed over the next few years at elevating tiny, densely populated Macau, the only place in China where casinos are legal, to the status of a “world center of tourism and leisure,” as the Macau Government Tourist Office likes to think of it.

The expansion got Galaxy a slight bump in market share, but there was little to show for its impact on that bigger tourism picture. Citywide visitation, hotel guest numbers and hotel occupancy all were off in June, in line with softness that first emerged last year and was evident in the first quarter, when tourists spent $1.2 billion less than in the same period in 2014, in line with year-on-year declines in visitation, hotel guest arrivals and overnight stays.

Through July, gaming revenue is down 37 percent. And it’s gaming that’s most closely watched, since it drives 95 percent of the revenues of the six publicly traded casino concessions. It’s the gauge everyone studies for a read on the preferences and propensities of the mainland Chinese on whom the industry’s fortunes, and the city’s future as a destination, depend.

In absolute terms, the haul through the first seven months was characteristically massive—$17.5 billion, the revenue equivalent of almost three Las Vegas Strips. Yet it’s obvious from the scale and duration of the slump that mainlanders aren’t gambling the way they used to.

Mostly what’s fallen off is credit-driven VIP play, most of it contributed by wealthy gamblers from neighboring Guangdong province on the Chinese mainland. VIP started to decline last May, and revenue from the sector ended 2014 down more than 30 percent year on year. It was off more than 40 percent through June. VIP drove a 10-year boom that saw gaming citywide peak in 2013 at $45 billion, accounting for 70 percent or more of the market over that time. So the size of the problem is evident.

The culprit is a new culture of austerity, probity and discipline within the ruling Communist Party that finds the VIP lifestyle in the crosshairs, perceived as a facilitator of corruption, graft and capital flight. Investigators unleashed by President and CPCC boss Xi Jinping are purging the party, the military and the state-owned companies that dominate the economy. Not surprisingly, high rollers have deserted Macau en masse.

The scrutiny also is affecting the mass market, making it more difficult to evade the country’s strict limits on currency exports and crimping spending. A locally imposed smoking ban on the public gaming floors isn’t helping either.

Nor is a sputtering Chinese economy, which is beginning to feel the pain of the over-investment and under-consumption that fueled the rapid industrialization of the last 30 years. GDP is growing at an official rate of 7 percent, the lowest in six years, and outside experts suspect the real number may be more like 4-5 percent. This is still considerable for the second-largest economy in the world.

%image_alt%But public debt has risen to $30 trillion, a lot of it expended on wasteful infrastructure projects to juice growth and prop up moribund state-owned businesses. The financial system is still relatively unsophisticated, and offers few legitimate investment options for a nation populated by the most prolific savers in the world (as they’ve had to be, given that the health care and social welfare systems are appallingly weak).

This has tended to foment bubbles: property was the darling for the longest time until prices gave out beneath an eventual glut of supply; more recently, it’s been the stock markets, which soared to such levels over the last year that when the crash came, the plunge in share prices at one point this summer wiped out $3 trillion of paper wealth.

Retail investors have been battered. The hit to GDP this year could end up at more than $30 billion, according to some estimates. It’s believed in independent circles that the cost to the government to bail out the markets could surpass $1 trillion.

A ‘Changing Construct’

What does all this mean for Macau? Well, in addition to their fear of Beijing’s watchful eye, if the mainland’s rich are feeling less rich, higher-end cash won’t be picking up the slack. Mass revenue fell from Q1 to Q2, the Galaxy opening notwithstanding, and through June was down more than 30 percent year on year. For a city with Macau’s aspirations, this is worrisome.

As of last month, the consensus among investment analysts was that gaming’s total take for the year will fall shy of 2014’s $44 billion by 30 percent—and that’s accounting for the classy new hotel and non-gaming attractions at Galaxy Macau, a relaxation of transit visa rules for mainland visitors that commenced July 1, and the much-anticipated opening on Cotai in October of Melco Crown Entertainment’s $3.2 billion Studio City.

Which begs a second question: How much of the downturn can be laid to Macau fatigue? It would not be unexpected, as China’s travel-hungry millions grow more affluent, more mobile and more worldly. In its extensive research into mainland travel patterns and preferences, investment bank CLSA scores today’s Macau a tepid 45 out of 100—15th of 26 destination countries—measured in five categories: hotels, dining, attractions, accessibility and shopping (though it does rate high in the latter two). 

“Macau doesn’t have a lot of product to appeal to a larger base of Chinese,” says Vitaly Umansky, Hong Kong-based senior research analyst for gaming for global asset managers Sanford Bernstein. Besides gambling, “there is not much else to do for people looking to travel somewhere for more than one day.”

As Galaxy’s John Au said in that early August interview in the Economic Times, “We think that the city needs an adjustment period. We don’t think it’s healthy to attract tourists here by using only gaming elements.”

If the bleeding is to stop, in other words, and obviously the concessionaires bulking up big-time on Cotai know this, Macau must become much more than it’s been up to now. Which may prove to be less about building better individual mousetraps and more about integrating with a larger tourism picture encompassing all of the Pearl River Delta—Hong Kong and its international airport, the large neighboring island of Hengqin, the greater Zhuhai metropolitan area on Macau’s border—and from there to all of China and to East Asia beyond. A lot has to happen in terms of roads, bridges and rail, improved communications, and collective marketing, to make this a reality. But it is happening.

“We’re seeing a transformation of China,” says Grant Bowie, chief executive of gaming concessionaire MGM China Holdings. “It is not really a Macau issue exclusively. It’s about the whole of Asia, really. It’s a changing construct globally. Everyone is looking at China to carry the world. But they have their own issues. It is going to be really, really challenging for China to transform from an infrastructure-driven economy to a consumption-driven economy. That’s what we do. But we have to be actively and completely engaged in the whole region.”

The ‘Status’ Shift

Bowie, whose company operates MGM Macau on the Macau peninsula and is building a $3 billion super-resort slated to open on Cotai the end of next year, sees similarities between the market’s current travails and the slump that followed the global financial crisis of 2008-2009, a period doubly marred by some Macau-related scandals that prompted Beijing to curb travel to the city.

“It allowed all the organizations to become efficient,” he says.

Melco Crown co-Chairman and CEO Lawrence Ho also recalls those years. “We opened City of Dreams in 2009 during the financial tsunami,” he says. “We successfully weathered the tough time, achieved great success for the company and meaningfully contributed to Macau’s tourism and economic diversification.”

Needless to add, Bowie and Ho and their counterparts have learned a great deal along the way about the Chinese consumer, and the highly aspirational culture that spawned that consumer, and the rapidly evolving choices in response to a variety of economic and social factors.

Deutsche Bank gaming analyst Karen Tang touched on this early in the year when she wrote, “We believe that wealth creation in China is changing from ‘resources and relationship-based’ (as in the coal-mining and property industries) into ‘innovation and entrepreneurial-based’ (as in internet and consumer services).”

Companies that earn their bread by staying ahead of this dynamic, like Shanghai-based China Market Research Group, see major changes afoot in how well-heeled mainlanders spend their money.

“They no longer gain status by buying expensive handbags,” says Sean Rein, CMR’s founder and manager director. “Rather, they gain status by buying a third or fourth home overseas or by going on a once-in-a-lifetime exotic trip—like wine-tasting in France”—and sharing their adventures on social media.

CMR forecasts Chinese expenditures on luxury goods will drop 2 percent this year. Considering that they are the largest purchasers of luxury products in the world, accounting for around one-third of global sales, this is a big deal. Names of the stature of Prada, Kering (Gucci, Alexander McQueen, Stella McCartney) and Louis Vuitton are feeling the pinch.

Chow Tai Fook, the largest jewelry retailer in the world, reported sales down 16 percent in Hong Kong and Macau in the second quarter. A trade group representing Macau retailers says so far this year, sales of high-end products are down between 30 percent and 50 percent.

“Many people blame the corruption crackdown, but (it) is really about consumers becoming more sophisticated,” says Rein. “Chinese are no longer buying just to show off. It is more about a mix of investment and showing off, and they are concerned about lifestyle.”

‘Creating’ China

In line with this, international travel will continue to see “major growth,” Rein says, but with an important caveat: “Chinese want to go where other Chinese have never been before.”’s “Chinese International Travel Monitor 2014” found that “95 percent of Chinese international travelers say they are more interested in visiting different international destinations than returning to places they have already been.”

CLSA cites this in a voluminous report released in January, bolstered by its own extensive polling of repeat travelers within China, to reach conclusions similar to those Rein implies. Hong Kong and Macau will remain top destinations, with proximity, language and cultural affinity still in their favor, but growth rates will pale compared with North and Southeast Asia, Western Europe and the United States.

Bowie says, “With the Chinese, the history has been: first you copy, then you adapt, or modify, then you create. The Chinese are at the point where they are sick and tired of just copying; they want to create. So this isn’t just something we’re being confronted with. They’re wrestling with this all over the country.”

Structurally, politically, what it all adds up to is that the gambling volumes that made Macau a wonder of the world are probably gone forever. This isn’t necessarily a bad thing.

There is Cotai, which if it’s about anything is about the opportunity to become something much more—a true “Las Vegas of the East,” as the city often is called, erroneously up to now, capable of retaining repeat visitors and attracting growing numbers of new ones on the strength of its total offering.

Ambrose So, executive director and CEO of SJM Holdings, sees “the rise of a discerning middle class in Asia, China especially,” that “has created new demands for the tourism industry.

“Visitors are more sophisticated and clear about their preferences,” he notes, “demanding unique and personalized experiences with a high standard of service.”

This bodes well for Cotai, where SJM, the city’s only native operator, the successor to the monopoly once enjoyed by Lawrence Ho’s father, the revered Stanley Ho, is spending some $3.9 billion on a Versailles-themed megaresort, Lisboa Palace, that aims to cash in on the country’s infatuation with all things French.

So maintains, “The prospects for growth of mainland tourism to Macau are as great as the prospects for continued growth of mainland Chinese tourism in general.”

The country sent 100 million travelers into the world last year, more than any country by far. CLSA expects that will double by 2020.

“We couldn’t be more bullish overall,” says Aaron Fischer, the bank’s Hong Kong-based head of consumer and gaming research. “Macau will still represent an attractive destination. And with the new resorts, there will be a significant amount of non-gaming attractions.

“Remember, Macau benefits from location; it’s on the doorstep of China. That is not going to change. It’s a major advantage. And you look back over the last 10 years, there has been major investment. In three years’ time the total investment in integrated resorts will be $50 billion. No one else is even close.”

James Rutherford is a freelance writer covering the gaming industry. Recently returned from three years in Macau as a non-resident worker, he is currently based in southern New Jersey. He can be contacted at

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