If the devil really does wear Prada, then he should soon feel perfectly at home in Macau
Prada and other famous name brands have indicated they are willing to set up two or more outlets in Macau to take advantage of the tourist gold rush expected in the next few years.
The amount of retail space in Macau is set to explode from a mere 330,000 square feet on the Macau peninsula and Taipa today, to six million sq. ft before the end of the decade, according to research by the retail developer Taubman Asia. It represents a rise of 1,718%. During that period, 23,000 new hotel rooms will also be built. The number of visitors to Macau grew by 18% last year to 21.9 million – more than half of the total coming from Mainland China according to the government’s Statistics and Census Service (SCS). At that rate, the number of annual visitors will nearly double in three years.
By comparison, neighbouring Hong Kong experienced a steady but more modest rise in tourist numbers, of 8.1% last year. The amount of new retail space coming on to the Hong Kong market this year and next is only 177,000 sq. ft according to Hong Kong’s Rating and Valuation Department, though that city is starting from a much more mature market. It has 34.1 million sq. ft of commercial space – much of it retail.
Taubman Asia estimates the amount of retail space per Macau hotel room will rise from 26 sq. ft last year to 184 sq. ft by 2009. Retail space is one thing, but earnings per sq. ft of retail space are a more reliable indicator of economic success.
Earnings dilution ahead?
Some observers have suggested the extra capacity will dilute earnings per store. Early reports from the 12 luxury brands that set up home in Wynn Esplanade – the arcade of shops at the Wynn Macau casino resort that opened last September – seem to contradict this.
Morgan Parker, President of Taubman Asia says: “We take considerable solace from the experience of Wynn. It’s not a large project, but it’s 12 great stores – all of them setting records across Asia for their performance and it’s the beginning of the story.”
Taubman has a vested interest in researching the market, as it recently took a 22% stake in the retail portion of the US$2 billion Macao Studio City on Cotai. Work has begun on the site and Taubman hopes the retail development will be completed by mid-2009.
Mr Parker says: “We haven’t reached the stage yet where we can announce names of retail partners, but we are working with all the world’s luxury names. In the last few months it’s become a bit clearer as to what our positioning is – so it’s news that we’re actually premium. We had to go through a lot of evaluation of opportunities in Macau looking at the spending patterns of people before we arrived at this size and this positioning.”
In many business sectors, being first to market can give a decisive advantage. By that measure, Steve Wynn has the drop on his rivals in Macau’s luxury retail sector after persuading Chanel, Christian Dior, Fendi, Giorgio Armani, Louis Vuitton, Prada, Tiffany & Co., Piaget and Bulgari to set up shop at Wynn Esplanade.
Mr Parker from Taubman suggests though the reality of Macau’s retail market is more complicated.
He says: “A lot of those retailers that have already committed to go into Macau retail sites are saying to us ‘Sure we will open a store in DFS that might be 300 sq meters or 200 sq.m. but we would like to open a store in yours of maybe 800 sq. m.’ Retailers are looking at how they’re going to use each project.”
Density of outlets
He explains: “Hong Kong has 11 Louis Vuitton outlets, which is really quite extraordinary. That sort of density can only happen in cities like Hong Kong, and in casino environments. These are the only two ways you can support such a density [of outlets].
“In Macau we’re seeing retailers commit to stores, and seeing them open more stores in more projects. Louis Vuitton for example, has already got three commitments just on the Macau peninsula. One is at the Mandarin Oriental, as well as the outlet at Wynn. Before Louis Vuitton even opened in Wynn they committed to the Hongkong Land project at One Central – for a flagship store.
Citing the Louis Vuitton example, Mr Parker says the retailers’ multiple outlet strategy is to have flagship stores selling a wide range of products, including shoes, ready to wear and large luggage items, plus smaller network stores carrying accessories.
He says: “Those larger flagship stores you would think on a per meter or per foot basis would do less business, but the reality is they become destination stores. It becomes a self-fulfilling prophecy that the flagship does more business and productivity does not go down.
“When you increase size of a store, it allows you to stock more merchandise and increase the probability of a transaction. However, there is a very sensitive point where if you go over a certain size, you can start to see productivity dilution. These days retailers don’t tend to make that mistake too often.
“You can see the retailers understand the opportunities and are getting excited about them. They are opening multiple stores close together because they feel confident about the density of spending.
“This is because the volume of people passing through is so high. In Macau there are projects potentially attracting 20 to 30 million people per year. The sheer volume of people, the extended trading hours the venues enjoy – 24-7 very often – and the money to be made in these environments means the retailers want to have more points of distribution.
“Another factor is that these casino projects are almost like cities in their own right. It makes retailers feel they want to be represented in each one of them and think of each one as its own market. People can go into one of these casino resorts and spend a whole day there. In Las Vegas, some people don’t come out of them for a week.”
Half the new retail capacity in Macau will be provided by Las Vegas Sands Corp (LVS) on The Cotai Strip™, its US$14 billion city-sized development on reclaimed land north of the Macau peninsula. It features The Venetian Macao Resort Hotel, a scaled up version of the company’s famous Las Vegas resort, The Venetian. The complex will have its first phase opening in July. Earlier this year LVS said it had signed up 400 retailers for its onsite shopping complex, known as Grand Canale Shoppes, which will have a million sq. ft of active retail space on three floors.
In addition, there will be an 86,000 sq. ft mall from DFS at the Four Seasons Hotel on the Cotai Strip™ site, including plans for a 3,000 sq. ft Prada store, to complement the brand’s 2,000 sq ft outlet at Wynn Esplanade. Sebastian Suhl, Prada’s chief executive officer in Asia, indicated recently the brand could even open a third store in Macau next year, but has not confirmed the details.
This multiple-outlet approach is already familiar to Hong Kong shoppers, but a novelty in Macau.
Singapore and Hong Kong took decades to build themselves into world famous shopping destinations. Macau plans to become a shoppers’ paradise almost overnight – and all without even a whisper of a suggestion of a sales tax, thanks to the government’s healthy bank balance resulting from the millions of US dollars paid in tax annually by the gaming industry.
The reality of course, is that without all the new casinos, the shops wouldn’t be coming at all. Retail therapy is an integral part of the business plan of LVS and other foreign investors to change Macau from a destination for low-spending day trippers, to a holiday resort for high-rolling jet-setters and convention delegates just as interested in trawling the malls as in crowding around the baccarat tables.
Macau’s retail potential
Total retail spending in Macau is currently a tiny fraction of the amount generated in Hong Kong – 2.9 billion patacas (US$362.5 million) in the fourth quarter of 2006 compared to Hong Kong’s HK$56.2 billion (US$7.2 billion) in the same quarter says Helen Mak, Senior Associate Director at property consultants Colliers International, in Hong Kong.
Research from Hong Kong shows that people who stay overnight spend more money, even when hotel costs are left out of the equation.
Last year, 51% of Macau’s visitors were day-trippers, mostly from China, spending on average only 522 patacas (US$64.79), according to Macau’s SCS. By contrast only 37.3% of Hong Kong’s tourists were same-day visitors, spending on average HK$1,015 (US$130). The 62.7% of Hong Kong visitors who stayed at least one night in a hotel spent HK$4,799 (US$ 611) on shopping – 78% of it on clothing and cosmetics, according to figures from the Hong Kong Tourism Board (HKTB).
Chinese citizens staying overnight in Hong Kong were on average from higher socio economic groups than day-trippers.
A total of 60% of them were college or university graduates, 37% of them were in the prime 26-35 age range targeted by marketers for their disposable income and fondness for branded goods, and 63% were travelling with a companion – ideal for driving spending on shopping and restaurant trips, according to HKTB. Their average retail spending compared favourably with western visitors, at HK$4,705 (US$602).
Although such market comparisons and the growth of China’s economy suggest the new look Macau will be a success, major brands aren’t entering the market purely based on guesswork. Daisy Sam, head of research in Hong Kong for Synovate, the international market research company, says a number of clients have asked it to compile reports on Macau’s prospects.
She says: “We have done work for clients on the Macau retail market, but it’s proprietary material, so we can’t share it.
“What I can say though is it will take some time for Macau to build an image as a shopping paradise, given that there are limited facilities at the moment. Most visitors from the People’s Republic do not currently see Macau as a shopping destination.”
Stanley Ho had a four-decade long monopoly on casino operations in Macau until 2002. His children understand the direction the market is now taking, and have adopted the gaming, shopping, dining and general entertainment business model first developed in Las Vegas.
Other mega projects
Melco-PBL Entertainment, the joint venture of Melco, run by Dr Ho’s son Lawrence and Australia’s Publishing and Broadcasting Ltd run by James Packer, will provide the gaming licence for Macao Studio City.
Melco-PBL’s Crown Macau at Taipa, which was due to open at time of going to press, will also have retail space, as will Ponte 16, the project part owned by Dr Ho’s Sociedade de Jogos de Macau and due to open later this year on the edge of the old port. Hongkong Land will be a partner with Shun Tak Holdings, run by Dr Ho’s daughter Pansy, in One Central, a development on Macau peninsula, which will have luxury shopping as well as up market apartments.
In today’s globalised and highly integrated business environment, retail brands are nearly all controlled by conglomerates with a wide range of business interests. This helps to create investment synergies between brands and resort developers not seen in previous economic cycles. DFS, the luxury mall operator planning a presence at Cotai, is part owned by LVMH Möet Hennessy Louis Vuitton. LVMH in turn owns scores of brands, including Fendi, Kenzo, Donna Karan, Marc Jacobs, Guerlain, Givenchy, Parfums Christian Dior and Tag Heuer as well as Louis Vuitton itself. DFS, originally known as Duty Free Shoppers, was founded in Hong Kong and was once part owned by Stanley Ho’s Shun Tak Holdings.
Enclosed, air conditioned shopping is particularly suited to southern China’s hot and humid climate. An increasing amount of Hong Kong’s retail space is now connected either directly to underground railway stations, or to climate-controlled walkways perched above that city’s notoriously noxious traffic.
On a recent visit to Macau, Sheldon Adelson, the chairman and principal shareholder of LVS, claimed one of his friends was so engrossed with a visit to his Venetian property in Las Vegas, that the friend had no idea what the weather was like outside.
There has been some scepticism in the media about whether Macau can manage in a few years what it took Las Vegas 20 years to achieve, namely a transformation from a hardcore gambling town to an all-round entertainment destination.
Atlantic City parallels
Mr Parker says there are clear parallels between Macau’s development and that of Atlantic City in the United States – another casino town that previously had a public relations problem.
He explains: “Atlantic City and Macau are places that have had an unfortunate perception problem over the years. Both were considered to be hardcore gaming towns with visitor profiles including large numbers of people from lower socio-economic groups. They are now moving towards a more balanced profile of the sort we’re seeing in Las Vegas.”
Taubman built The Pier at Caesar’s – a 350,000 sq. ft luxury shopping mall as an extension to Caesar’s Palace in Atlantic City – against the advice of some pundits Mr Parker says: “The same nay sayers who are wondering whether Chinese visitors to Macau will shop or dine or stay in luxury hotels – all those same questions were being asked when we started planning that Atlantic City project several years ago.
“Now we are six months in to operating. It’s been terrifically successful and everyone’s been saying it was about time this was done. Everyone’s a genius now!”
He says retail sales in the New Jersey mall are now approaching Las Vegas levels of productivity. Las Vegas will have 324 sq. ft of shop space per hotel room by 2009.
The Pier at Caesar’s
Mr Parker thinks a recent media report that LVS was offering major incentives to retailers to come to Macau, and which LVS declined to comment on, has been overplayed.
He says: “Rental incentives and contributions to store construction are very common around the world – apart from Hong Kong – that is why the article struck a chord with the local community. More recently in Hong Kong we have seen incentives being given and we have seen important retailers getting large contributions to their costs.
“I think it’s important for Cotai overall that The Venetian opening is successful and the shopping centre is successful and the retailers in there achieve the type of revenues they hope for. We’re very supportive of that and hope it all comes together.
“The debate used to be about, ‘Oh will people shop in Macau and will gamblers be interested in luxury goods, can they afford it?’ etc – all that stuff that’s really plagued Macau over the last 12 months. That’s a redundant argument now in our minds.”
Macau stands out
“We are a conservative, prudent company. We looked at a few hundred deals around Asia in last couple of years, and selected Macao Studio City in particular to be our first project in Asia. We really as a company believe in the casino-retail story – the synergies between gaming and shopping are very clear to us.
“The whole thing about casino retailing and why companies like ours are keen to invest, is that these resorts create an emotion in the minds of visitors that makes those visitors the perfect consumer. These projects are all about creating a fantasy and then fulfilling that fantasy and really providing a dislocation from visitors’ own realities.
“People have got time and they’re in the mindset to shop before they even walk into the store. Once I started to understand that myself and started to think about the way my wife and I shop when we travel, I understood that it’s really about the human condition. Casino resorts are just taking advantage of that human condition and that’s why this environment produces the revenues it does.
“We have been successful in Atlantic City, in Las Vegas and now we expect to be successful in Macau.”