Macau casino operators will increasingly rely on non-gaming attractions to differentiate themselves and maintain profit growth. Last month, developers broke ground on Macau Studio City, one of a number of upcoming mega-resorts that will transform the city into a more complete tourism destination
In Macau, 90-95% of the revenues of casino operators derive from gaming activities, compared to only around 50% in Las Vegas. Macau’s current revenue mix is akin to that of Vegas in the 1960s. Vegas moved on, and so will Macau, presumably at a much accelerated pace.
CLSA’s Aaron Fischer predicted in his authoritative Macau Mania report that the share of non-gaming revenue in Macau will increase rapidly over the coming years, “particularly as the Cotai Strip develops and casinos attract visitors for business conventions and family entertainment as seen in Las Vegas.” He predicted non-gaming “will increase to at least 25% of total revenue by 2010.” However, “given the inherent love of gaming in Asia, this will still be below the 50% of revenue derived from non-gaming activities in Las Vegas.”
Good for Margins
The CLSA report pointed out that “hotel operations typically generate an Ebitda [earnings before interest, taxes, depreciation and amortization] margin in excess of 70%, while food and beverage and entertainment is narrower than the gaming activities’ margin of closer to 50%.”
The gaming activities’ margin in Macau, however, is likely to be significantly lower than that in Vegas, given the differences in the gaming markets of the two places. Slots, which have low overheads, contribute over
60% of gaming revenue in Vegas, but only 4% in Macau, where tables dominate. Meanwhile, the bulk of table gaming revenue in Macau comes from high-rollers playing VIP baccarat, and rising junket commissions are eating into casino operators’ profits. As pointed out in “A Junket Primer” in the last issue of Inside Asian Gaming: “VIP room operators used to offer their clients 0.7% of theoretical win (TW) as commission, leaving them 0.3% to cover their costs and contribute to their net margin. Now, with VIP room operators offering up to 1.0% of TW as commission, they have effectively given away their profit margin.” Gaming revenue in Macau is also taxed at a much higher rate than in Vegas, and relative to non-gaming revenue. Macau’s effective gaming tax rate is 39% (35% as direct tax and a further 3-4% as compulsory social and welfare contributions) compared to 6.8% in Nevada and 8% in Atlantic City.
Macau makes up for it high gambling tax rate with lower labour costs, however. Las Vegas Sands Corp (LVS) Chairman Sheldon explained to Inside Asian Gaming that the labour rate in Vegas works out to approximately 35% of revenue, compared to 5-7% in Macau, “so overall it’s almost the same.”
Excessive Returns
Gaming in Macau continues booming, and in 2006, the city’s gross casino revenue overtook that of the Las Vegas Strip. LVS’ Sands Macau has scaled back its unsuccessful high-end dining facilities to make way for more gaming tables – the high marginal returns on which have thus far discouraged investment in non-gaming attractions.
Following the liberalisation of Macau’s gaming industry in December 2002, Vegas-based operators made bold declarations about bringing world-class entertainment to Macau, but the theatre at Sands Macau has yet to stage performances, and Wynn Macau has left its theatre for the second phase of development.
Macau had 2,762 gaming tables as of end-2006, with supply increasing 99% year-on- year, compared to the 22% growth in casino revenue. CLSA estimates 2,870 gaming tables will be added to Macau’s current supply by 2008, leading to a marked decline in wins per table. Macau casino operators have thus far enjoyed a windfall from a spectacular gaming boom, but they will have to start pursuing non-gaming revenue and invest in transforming the city into a more complete Vegas-style tourism destination in order to continue generating healthy returns.
As a slew of ambitious new casino-centred properties come online over the next few years, operators will increasingly turn to non-gaming attractions to differentiate themselves and lure visitors. The introduction of major non-gaming draws, in turn, will transform Macau’s tourism and gaming market.
Macau currently lacks “stickability,” with the average visitor stay around 1.1 days. “There is a serious lack of non-gaming elements that are needed to draw tourists to stay a day or two longer,” explains Paul Steelman Design Group (PSDG) Asia Managing Architect James Wong.
PSDG – designer of Sands Macau – has been commissioned to design the US$2 billion Macau Studio City – “Asia’s first leisure resort property combining theatre, television and film production facilities, and Studio RetailTM, with gaming, entertainment and world-class hotels.” Studio City will sit along the Cotai Strip, where LVS and other Macau operators are frantically working to develop “Asia’s Las Vegas.”
Mr Wong emphasizes the need for Macau casino operators to increase their non-gaming offerings: “People in the industry say the [gaming] pie is getting bigger, but the tables are increasing in number, which means everyone’s profit margins will go down. Anybody who is doing a project is now looking at putting in more entertainment elements. You can thereby retain more family business and keep people here for a day or two longer. You give them more to do than just going to the tables. You give them shopping, you give them entertainment. That’s the best way for everybody to make Macau a real tourist destination.”
More About the Owners Macau Studio City is being developed by Cyber One Agents Limited, a 60/40 joint venture between East Asia Satellite Television Holdings (a subsidiary of Hong Kong-based eSun Holdings) and New Cotai LLC. eSun Holdings is one of Asia’s leading media and entertainment companies and an associate company of Lai Sun Development, a leading hotel and property developer. Both companies are part of Hong Kong’s Lai Sun Group. eSun holds 66.6% of East Asia Satellite Television Holdings (giving it a 40% share of the Studio City project), while the remaining 33.3% is held by Singapore’s CapitaLand. New Cotai, LLC is a consortium of US-based investors including David Friedman, Co-Chairman of Macau Studio City, and funds managed by Silver Point Capital, a private US-based investment firm, and Oaktree Capital Management, a global independent investment management firm. Mr Friedman is a veteran resort and gaming developer who led Las Vegas Sands Corp’s entry into Macau. He also holds a Nevada gaming license.
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Gaming Will Decline in the Mix
Macau Studio City is amongst the ten largest casino projects currently being built in the world. Phase one of the 2,000 hotel-room complex is scheduled for completion in the first quarter of 2009. The property will have 3.7 million sq ft of gross floor area, of which about 1 million sq ft will be devoted to retail space, film and TV studios, a concert hall and expo facilities. There will be 2,000 hotel rooms, and a relatively small 200,000 sq ft set aside for gaming, with 400 gaming tables and 1,000 slot machines. Construction of the second phase of the project will likely start in 2009, and pending government approval, the gross floor area could be increased to 6 million sq ft by 2011.
A comparatively small proportion of Macau Studio City’s total area will be devoted to gaming. LVS’ US$2.3 billion Venetian Macau, by comparison, will have 700 tables and 4,300 slot machines when it opens in July 2007. Mr
Wong points out that “the development and design of Macau Studio City is more into the way of a complete entertainment experience for people, rather than singling out gaming as the theme.”
Macau Studio City is being developed by three partners. Hong Kong-listed eSun Holdings (through its subsidiary, East Asia Satellite Television Holdings) has a 40% share of the project, New Cotai LLC, through a consortium headed by former LVS executive David Friedman, also has 40%, and CapitaLand, one of Singapore’s largest property developers, acquired the remaining 20% in January.
The casino will operate under the license of Melco PBL Entertainment – one of Macau’s six gaming concession holders. Marriott International has submitted a letter of intent to manage both a Marriott hotel and a Ritz-Carlton hotel at Macau Studio City. Phase One of the project will also include a new 6- star boutique hotel concept called The Tang Hotel, created by David Tang, founder of the China Clubs and Shanghai Tang.
Entertainment DNA
The entertainment element of Macau Studio City will be provided by eSun, a major player in the Chinese live entertainment and film-star market. The company says it will “inject its media and entertainment ‘DNA’ across the full range of activities and experiences that guests will enjoy at the property.”
CLSA’s Gavin Ho elaborated on eSun’s role in the project: “For example, it will leverage its satellite network and have live-audience television events taped on its property in which guests can participate – game shows, music events, contests and the like, with Asia’s favourite talents. It also plans to work with major retail partners to have televised fashion events, and film, television and star-tie-ins and sponsorships that will excite audiences and guests alike, and bring Asia’s most important stars to the shopping mall’s walkways.”
The entertainment facilities at Macau Studio City will include a 2,300 seat theatre, a 4,700 person capacity multi-function venue capable of hosting sporting and MICE (meetings, incentives, conventions and exhibitions) events, stand-alone state-of-the-art television and film production facilities and a 1.4 million sq ft Studio RetailTM complex.
Studio RetailTM
“Studio RetailTM will integrate live-audience taped lifestyle and fashion programming throughout the retail environment,” according to PSDG. Shopping at Macau Studio City “is an experience whereby you are continuously interacting with the entertainment element, which is either in the film or music area,” explains Mr Wong. “You will be visually and sensually entertained at the same time as you are going through your shopping experience.”
Several attraction corners will be interspersed in the retail area, where visitors might witness a film shoot, celebrity-interview, or small-scale music or theatrical performance. The multi-function venue could see taping of TV shows and other performances in front of a live studio audience, and “we also have small recording studios peppered around the place,” adds Mr Wong.
In January, Taubman Asia was appointed as Macau Studio City’s preferred retail partner. Taubman Asia is a subsidiary of Taubman Centers, one of America’s biggest shopping mall developers. Taubman’s retail projects include The Pier at Caesar’s in Atlantic City, the future MGM MIRAGE CityCenter retail district development in Las Vegas, and other retail properties spanning from Beverly Hills to Orlando, Florida.
Taubman Asia President Morgan Parker was initially concerned about retail over-capacity in Macau, given the forecast creation of 6 million sq ft of new retail space in the city over the next three years. In October 2006, Mr Parker said the development was too much too soon, but he has since changed his assessment. On the announcement of his company’s partnership with the Macau Studio City project, he commented: “We are extremely confident Macau won’t be oversupplied with retail” as long as the pace of development for casinos, convention centres and resorts continues.”
Mr Parker says further research on the market convinced Taubman to enter Macau. Taubman manages 23 regional shopping centres in eleven US states, and the company feels it could use its strength and experience to establish a dominant position in Macau’s nascent resort-centred retail market. Mr Parker also called into question the 6 million sq ft forecast, pointing out “a lot of the supply is either delayed or not being built. There are big question marks about what’s being built.”
Furthermore, Mr Parker adds that even if the 6 million sq ft gets built around new hotel rooms, Macau will only have 17 sq m of retail space per hotel room compared to 33.5 sq m per room in Las Vegas. Vegas currently has 41 million sq ft of retail space compared to Macau’s 1 million sq ft.
So Long Hong Kong
Macau bulls believe the massive new supply of quality retail space in the city will allow it to draw mainland Chinese visitors who currently travel to Hong Kong to shop, especially since Macau will soon also offer a wider variety of entertainment and cheaper and higher quality hotel accommodation.
Mr Wong echoes that sentiment and scoffs at the suggestion that it will take several more years for gambling-hungry mainland Chinese to start demanding non-gaming attractions to a sufficient degree to support Cotai’s mega-resorts. “I think they would come if this project opened tomorrow. I think only because of a lack of it are they turning to Hong Kong. When such facilities become available in Macau – and they may be even better than the Hong Kong ones in terms of novelty and design – people will find that Macau is where they want to come and spend their money and stay a couple of days more before they go to Hong Kong just to go to Ocean Park, and god forbid, even Disney.”
LVS is the most fervent follower of the supply-creates-demand thesis in Macau. The company is developing some 20,000 hotel rooms along the Cotai Strip in properties that include a total 3 million sq ft of retail space. Sheldon Adelson has a knack for knocking his competitors, and says he is not worried about the Taubman project. “If you were a shopper and you were staying in one of our 20,000 rooms, would you leave the property, walk down the street and go to another property simply because it’s stand-alone and Taubman developed it?” he asked. “I can assure you that American developers mean little or nothing to Asian retailers.”

Entertaining Potential
Entertainment in Macau has even greater growth potential than retail, if only because the base is so low. As CLSA’s Gavin Ho points out, in 2005, 71% of visitors to Las Vegas attended shows during their stay, taking in an average of six shows. Vegas visitors spent an average US$137 and US$49 per trip on shopping and entertainment, respectively. Meanwhile, Macau’s mainland Chinese visitors spent an average US$237 – 73% higher than Vegas visitors – on shopping in 2005, but because of the almost complete absence of shows in Macau, spent almost nothing on entertainment.
Considering the cash they splash on shopping, mainlanders could at least theoretically afford to splurge on entertainment as well. “Affordability aside, we believe shows and concerts should have strong appeal, provided they are the programmes these visitors are looking for,” writes Mr Ho. “Andy Lau, for example, who has won countless music and other awards in mainland China, Hong Kong and overseas, could easily pull a full house in a mainland show for which tickets sell at up to Rmb1,000 (US$130).”