Tables Turned
Galaxy’s bosses outline their thoughts on the Macau market in general and the company’s prospects in particular during 2009
In a wide ranging discussion with Galaxy Entertainment Group Vice Chairman Francis Lui and Group Chief Financial Officer Robert Drake, Inside Asian Gaming touched not only on the future of the Cotai project, but also the general thrust of Galaxy’s Macau strategy, including the future of the CityClubs and the positioning of StarWorld Hotel & Casino. The conversation also covered macroeconomic issues including the prospects for the general Macau market for the remainder of 2009.
IAG: Do you think given current economic conditions there will be overcapacity in Macau’s table gaming market in 2009?
Mr Lui: “I think 2009 is going to be a challenging year. I think if you read most of the reports by the merchant banks—Morgan Stanley, Deutsche Bank and so on—they are all predicting that the market is going to take a downturn this year, ranging from 15%, to 10%, to 5%. Even the Macau government has mentioned that 7 billion patacas in turnover per month is the expected number. In January in fact we hit 8.5 billion, much more than previously estimated, so everyone’s happy—at the moment.”
Mr Drake: “January ’08 was also the highest grossing month ever in the market with north of 10 billion patacas.”
Mr Lui: “You have to understand that last year there was a huge growth, because of the credit and the liquidity put into the market. Last year in January you saw an explosive growth. So this year, compared with last year, we have something like a 17% drop in gaming revenue.”
Would you say that last year the VIP table market was a little bit artificial in that Amax’s commission offer at Crown Macau drove a junket war?
Mr Lui: “There were a lot of tables being added in the last quarter of ’07. I think there were something like 1,000 tables added in the second half of ’07, and the price war started in Q1 2008. That’s why you suddenly saw that explosive growth that Bob referred to.
“The question we were asking ourselves was ‘Is this sustainable? Is this something where we wish to join the fight?’ We chose not to. And suddenly you see our market share from 15% drop down to almost below 10% at one stage. That’s a lot of market share. But it wasn’t because we were doing in absolute values worse than before—it’s just that the market had suddenly grown by about 50%, so this means relatively-speaking, in terms of market share, we lost percentage.”
Has there been a problem with bad debt for some operators because of too aggressive an expansion in the VIP sector?
Mr Lui: “I suppose looking at it with 20/20 hindsight, a lot of people decided that extending credit was not a wise thing to do. You can see the market share coming back down again and everyone’s becoming more realistic. This year, again, it’s not like last year where you could get credit easily. Liquidity is an issue, therefore people are taking a more conservative approach.
“I agree with the call made by Gary Loveman, CEO of Harrah. He said: ‘The arms race is over’. Nobody’s trying to build a bigger, better casino now. Everybody’s trying to improve their bottom line now. I believe that’s a healthier sign.”
If the Macau VIP market is now finding its own level, does that mean it is no longer necessary to have a formal, if technically voluntary, cap on VIP rolling chip commission rates?
Mr Lui: “I still believe that the government will issue a cap restriction sooner rather than later and that it will be implemented.”
Can you explain the business proposition with CityClubs?
Mr Lui: “In the CityClubs, many of the junkets—we call them service providers—own a substantial interest in the property, we are just leasing a space where we run it as a casino, whereas in our StarWorld, the junket doesn’t have to pay the capital costs of providing the venue, which means that the margin we get from StarWorld will be higher than the commission we will get from CityClubs. At CityClubs we have to give something back to the service provider, because they are the ones who invested capital to put up the building.”
Galaxy’s CityClubs appear to be under pressure, and their future looks uncertain. What was your strategy with the CityClubs?
Mr Lui: “The strategy we took five years ago when we first entered the market was not just about the money. At the time, as you know, Galaxy was a company with no legacy in gaming, so we needed to get into the market quickly, and needed to get to know quickly how to do business in Macau and establish a management team and also to quickly capture some market share and feed that into the system. That is as important as the money side. I think the object was to get our hands dirty quickly so to speak, get market share, get a management team going—in short, get experience.
“We felt that eventually the bigger, more expensive properties were going to be dominating and would pressure smaller casinos, such as the CityClubs. This is why we were saving up our capital and investing it in a property like StarWorld and over in Cotai. There’s no hiding the fact that the CityClubs will be under a bit of pressure from now into the future, because all these bigger properties are very competitive.”
Were there any technical or practical problems in opening CityClubs to start with? Have they been addressed?
Mr Lui: “Waldo Casino was in operation in ’04, and then Rio Casino, President Casino and Grand Waldo Casino were open in ’06. It could have been faster, but we’re happy with the timing. What we didn’t realise at the time was that there would be a financial tsunami coming this year that would knock everybody off course. There was also a commission price war that started last year. We thought there might be some pressure on pricing, but to have it start more like the early part of last year was a little bit outside expectations.
“We have changed the business model a lot. Three out of four CityClubs are now on a top line revenue arrangement which means we would probably benefit our bottom line.
“On top of that, we are also sitting down with our service providers to see how we can trim costs. So starting late last year we were probably one of the first operators who decided we needed to reduce the number of gaming tables in the CityClubs and to make it more efficient. That way we think they can survive, because all of the CityClubs that we have are attached to hotels. Instead of trying to capture market share as a resort casino, it’s more about offering a gaming service to hotel guests. That means we are not going to have 50 or a hundred tables in each venue. CityClubs are not the sort of venue where you are trying to attract hundreds or thousands of people coming in as day-trippers.
“At one of our CityClub properties, for example, we have managed to turn it into an amenity. What I mean is that the hotel is operating full, so guests have the convenience of being able to come down and play in the casino. So in that case we are able to take a lot of the [casino operation’s] costs away.”
What do you think will happen to table capacity in Macau in 2009?
Mr Lui: “We closed tables at the CityClubs last year. It’s not just us closing tables. Everybody is doing it. An interesting number to note is that back in the third quarter of ’07, the total number of gaming tables in Macau was only around 3,000, by the end of 07′ it peaked at 4,400, a 50% growth within 1 year. By the end of 08′, it came back down to 4,000 tables. So you can see that the market is consolidating, which is good.”
In gaming markets outside Macau, the emphasis is often on getting the casino element operational before opening hotels and other amenities. Is that a possible strategy for you on Cotai?
Mr Lui: “If you are looking at our strategy as a company, we are doing exactly that. The CityClubs are basically a cash box to us. Somebody pays for the facility, we go and manage it and get the cash out. If you look at StarWorld it’s a very efficient casino hotel. You can’t say that it is a fully integrated casino resort where you have the theatre, the arena, the convention centre and the shopping mall, but this is a very efficient hotel casino, where the emphasis is still on gaming, and then we have some amenities such as hotel rooms, coupled with it. Again, this is a cash box. If you go into Cotai, that’s a different story. We believe it’s got to be an integrated resort, because Cotai is a destination area. StarWorld is located in the heart of the Macau peninsula. It’s downtown. It’s where everybody comes and goes. So whether you have all the amenities or not on your property, you will find them somewhere else downtown. But in Cotai we believe it has to be integrated from day one.”
How will your Cotai project differentiate itself in the market?
Mr Lui: “On Cotai we are using a ‘blue ocean’ strategy. We are trying to create something different from the rest. That’s why we see right now even the architecture is different. It has much more of a resort feel. This is why when other investors are signing up international hotel brands; we are going for the Asian hotel brands. We have teamed up with Okura, we have teamed up with Banyan Tree—both Asian brands. They are excellent brands in any market, but the reason we chose them is for specific reasons. We wanted to create an Asian feel to it. Banyan is a resort brand in its own right, so this is the kind of atmosphere we want to create, because we think the market’s not being covered at the moment.”
Is there a market for so many luxury hotels on Cotai?
Mr Lui: “It’s a good question. That’s why in Cotai we have three brands. We have our own brand, we have Okura, and then we have Banyan Tree. Banyan is of course the top tier, where you have your more affluent, more high-end customer. We also have our own hotel, which is more or less catering for the mid market, for the family, for the people who want to come here for a holiday. And we have Okura right in the middle. We feel that it is a market not well covered by the existing properties.
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“If you take a look at some of the other operators, they are all top brands. That’s a great market, but there’s also a great market for another tier of customers if we’re able to capture it. With our integrated resort structure, we can cater for the first tier customer, at for example the Banyan Tree, but we also have 1,500 rooms catering for a second tier market, where we feel there’s a gap that we can fill successfully.”
Are you happy with StarWorld’s performance so far?
Mr Lui: “In business you always strive to do better. And in fact starting from the second half of last year, our market share in StarWorld started coming back up. We lost market share previously not because we were doing worse, but because that explosive VIP market growth was being triggered by a loosening of credit.
“But people now recognise there’s a changing strategy [in the market as a whole] and we believe our performance is going to get better. That’s not just in revenue terms but in terms of increasing our service too. At the same time we are also very mindful of cost control. So overall we feel that StarWorld will perform even better this year.”
Mr Drake: “The pricing advantage if you will was created by a ‘price war’ in the first quarter of last year. But over time we believe price is not a sustainable competitive advantage. Since you have levelled the playing field on price then what do you compete on? You compete on other things such as service. I think we do an outstanding job by virtue of our improving share. We are gradually increasing our share profitably and I think that’s proof that the strategy is working. We’re very well positioned now and in the future. StarWorld is a very successful property, with great returns on investor capital, and we do a great job servicing our guests.”
Are you interested in expanding your mass-market appeal at StarWorld?
Mr Drake: “If you look at the weighting of our revenue base, StarWorld is traditionally more weighted toward the VIP market and we’re positioned as that type of property. But at the same time you want to look at all different revenue streams and of course we’re building things like our premium play, which sits above the mass, and then the traditional mass play. That’s a very profitable segment of the market. Is it going to be like other mass-centric properties? StarWorld is not that type of property. Our property is a smaller offer on the mass gaming side by virtue of our constrained footprint. We’re going to increase our mass market on the basis of profitability, not on the basis of headcount just to make ourselves feel good. If there’s lots of energy on the floor you want to channel it profitably, just like with our VIP business, and of course you’re going to target all the segments over time. We think we provide great levels of service, not only to our VIP customers, but we think we do an equally great job to our mass customers. The point is we’re always striving to do better, in whatever segment, whether it be VIP, premium or mass market play.”
What role will standalone slots and multiplayer games have in the product mix at StarWorld in 2009?
Mr Drake: “From my old life in Las Vegas, one could say Vegas is a slot-centric model whereas here in Macau it’s definitely a table-centric one. It’s really a question of who your customer is and the mindset of the gamer.
“Here table games are viewed as games of skill—house versus man—and I don’t think that’s how slots are perceived here. Over time that may evolve as the destination model evolves. It’s still a very small percentage of the business. Will it grow over time? Probably, but nothing like the degree in other markets. Macau will still be a table-dominated market, but that’s not to say there won’t be significant upside in slots.”
Mr Lui: “At StarWorld, we have multi-station poker and live poker too. We do see some potential in slots which have traditionally almost been ignored in Macau. All the money’s been made in table gaming. But in some of the bigger properties where it is a fully integrated resort, it is attracting not just the pure gaming players any more, but the families and the holiday goers. And the electronic games offer is probably more suited to these consumers.
“Would the electronic games market take off at a property like StarWorld? Probably not. We don’t have the facilities to be honest. Probably in Cotai where we will have an integrated resort and be attracting a different clientele, then it will really take off.”
