Slots are powering Macau’s appeal to a new breed of consumer
Usually it’s the non-gaming stuff, usually the stuff at the top of the food chain, the five-star rooms, gourmet restaurants, the many purveyors of Rolex watches and Louis Vuitton bags, that observers point to when mounting a case for Macau’s evolution as a bona fide destination for the pan-Asian leisure traveler. In part this reflects the enormous private investment in high-end resort product, both existing and soon to come. Yet, the holy grail, or at least what everyone says they want—the casino concessionaires, the larger business and investment communities, local government, the powers in Beijing—is that vast middle class coming of age in China and within a few hours’ flight time: tourists, holiday travelers, vacationing families, the MICE trade, which if you had to describe their tastes and purchasing power it’d be decidedly more Las Vegas than Dubai or Cannes. Macau’s relevance to those millions isn’t found at the counter at Tiffany’s. It isn’t in the VIP rooms. It’s unfolding on the main casino floors, in the soaring revenues from small-stakes table games, and particularly in the remarkable growth of the machine gaming market.
Slots in Macau have grown into an industry approaching US$2 billion in annual revenue, and that’s a far cry from even a decade ago, when they were all but invisible. In 2003, the last effective year of Stanley Ho’s monopoly, there were about 800 machines in the entire city, laughably archaic devices by Australian or US or even Asian club standards. They generated about $29 million, accounting for less than 1% of a market worth in total about $3.6 billion across 11 casinos.
Last year, the city’s 30 or so operating casinos took in US$33.5 billion, the equivalent of more than five Las Vegas Strips. Revenues have grown 547% since the opening of the first post-monopoly casino in 2004, driven by floods of tourists and gamblers from Mainland China traveling on the Individual Visit Scheme, which was launched in 2003.
Slots have grown to account for 4.5% of this tremendously larger pie, good for US$1.43 billion last year. When a smidgen of your market is doing this kind of money, there is definitely something going on. “It shows that Asians certainly aren’t averse to slot machine gaming,” says Grant Govertsen, equities analyst with Union Gaming Research Macau. “You can even draw parallels to Japan with the pachinko and pachislot markets. There are something like 5 million of these machines in Japan. Something like 17 million people playthem. EGMs in Asia are the real deal. But it gets lost in the mix.”
It’s an interesting point. VIP baccarat, which drives better than 70% of casino revenues, tends to overshadow everything when you’re talking about Macau. It so dominates the market that its growth and that of the total market tend to track each other almost perfectly. Since 2004, VIP baccarat revenue has grown 558%. The annualized growth of overall revenue and VIP, 26.3% and 26.6%, respectively, reflect the same phenomenon. Slot revenues, on the other hand, have outpaced the growth of the total market on a percentage basis by 3 to 1. Whereas VIP revenue has grown fivefold, and mass-market tables sevenfold, slot revenue has grown sixteenfold.
“There’s certainly been a change, I believe, from how it was in the beginning,” says Ken Jolly, vice president-Asia for ShuffleMaster Asia.
Mr Jolly, who helped open the market with Aristocrat in 2004-05, recalls: “One of the comments in the early days that we used to hear was the Chinese player won’t trust a machine. They want to play live games. They want to play against the dealer, where they can believe through some superstition or power that they’ve got control. I think a lot of that has gone away now.”
Credit the advent of a larger and more expansive Western resort model. Then factor in sheer numbers: mainly the soaring rate of Chinese outbound tourism post-IVS. Figures compiled by the Macau government’s Statistics and Census Service show the impact of the IVS. Same-day visitor arrivals jumped 68% between 2002 and 2004—which, not coincidently, was the first year that sameday visits from Mainland China exceeded those from Hong Kong, a pattern that has been repeated every year since. From 17 million total visits in 2004, same-day and overnight, the city experienced 28 million in 2011. Of those, 58% were Chinese from the Mainland.
“Probably people are starting to get used to the games, because some of these people, particularly the Mainland Chinese, hadn’t seen a slot machine,” says Mr Jolly. “They didn’t really know how they worked. Now they’re feeling more comfortable because they may have been here once before, or twice before. There seems to be more of a community of people learning about new games.”
Of course, there are also a lot more machines out there, more than 16,000. There were 2,250 at the end of 2004. The product came up to snuff, too, and very quickly, and it’s impossible to overstate the impact of that as well.
“Right to 10 lines, 20 lines, just like that, feature-rich games,” says Andy Crisafi, vice president of operations at Weike Management Macau, which runs a number of slot floors around town under third-party agreements with concessionaire SJM. “In Australia and the States, you know, there was a gradual progression, from one-line games to three lines to five lines, and so on. Not here.”
Factor out language and some of the themes, and not only is there very little that separates Macau’s slot floors from any you’d see in the States, in some cases they’re more advanced.
“There is a real slot player in the region now,” says David Punter, general manager Asia Pacific for Aristocrat. “There is a real slot player coming from Mainland China and from Hong Kong, and this is greater than what we all thought originally from a tables perspective. There’s a market there. There’s a player there.”
With their relatively smaller wallets, slot players by definition are more casual players than what Macau is known for—more of a “Las Vegas”-style player—and far more profitable pound for pound than VIPs in terms of their impact on gross margins. In the longer run, the degree to which they help diversify the industry away from highvolume, low-margin VIP baccarat and its inherent volatility on returns and provide operators with a more stable and predictable source of income remains to be seen.
The distance that separates them from the denizens of the VIP rooms is more than just economic, however. They are representative of a new kind of customer, one perhaps less focused on hard gambling and more interested in a multifaceted entertainment experience. What this says about the evolution of the Chinese consumer has obvious significance for Macau’s future as a destination. The high end the city has down pat. The greater challenge will be to grow effectively with the desires and inclinations of a lower- and middle-income population
that is coming in increasing numbers.
“Entertainment is becoming more and more a part of Macau,” says Mr Crisafi, “and slots do bring that sense of entertainment.”
“Grossly Underpenetrated”
The rate of unit growth in slots since 2004 has closely followed the arc of the market at about 28% per year. Revenues, however, have grown at better than 43% a year. Average slot win per day, which stood at about MOP778 in 2004, according to figures compiled by the Center for Gaming Research at the University of Nevada, Las Vegas, stood at the end of last year at MOP1,950—13,500 slot machines later. That’s an average of $244 in win per slot per day in US dollar terms. Given that there is six times more supply today than eight years ago, this implies a market that remains considerably underserved—“grossly underpenetrated,” in the words of Galaxy Entertainment Group CFO Robert Drake, who has noted, “We do six times as much revenue as Las Vegas, but they have six times as many hotel rooms.”
The imbalance also implies, among other things, a measure of sustainability in current daily win over time that allows for some educated speculation about how large the market can get as more supply comes on line and as it continues to labor to catch up to levels of demand which themselves are anything but static.
“Much of the market, in terms of number of units, hasn’t grown as quickly as might have been expected,” says veteran analyst David Green, principal of Macau-based Newpage Consulting. “A few years ago, there were some suppliers who thought it would be a 30,000-40,000 machine market.”
Last year, the number of units grew about 14% year-on-year. Gross revenues increased by more than twice that, to 32.6%. In the first three months of this year, mass-market gambling—tables
and slots—grew 35.6%, while VIP was up 23.7%. It was the second consecutive quarter that the rate of mass growth outstripped that of VIP. Through the first quarter, Las Vegas Sands Corp’s Sands China subsidiary, which derives a greater proportion of its revenues from the mass market than its competitors, reported a 67% increase in slot handle at The Venetian Macao on the Cotai Strip and a 50% increase at Sands Macao, which is located near the main ferry terminal on the peninsula side of the city.
Galaxy Entertainment and Melco Crown Entertainment are likewise doing gangbusters. Across the street from The Venetian and next door to LVS’s new Sands Cotai Central, Melco’s City of Dreams reported a 34% increase in slot handle in the first quarter. Slot handle at the 1,500 EGMs at Galaxy Macau, which opened on Cotai last May, exceeded HK$10 billion.
On the peninsula, SJM posted a healthy 10% increase in slot revenue in the first quarter on a same-store basis. Wynn Macau, which removed 85 machines earlier in the year, saw handle drop slightly (0.6%) but still generated an impressive US$871 in average win per day across 924 machines. Slot volume grew 27% at MGM China Holdings over the period, outpacing the market by 100bps.
Then there is Mocha Clubs, which operates a citywide chain of 10 slot parlors, some in hotels, some in standalone facilities, as a division of Melco Crown. Revenues from Mocha’s 2,100 or so slots and electronic table games grew 10% in the first quarter to US$37.3 million. It’s a thriving trade in high-repeat local players that runs at EBITDA margins of 25% or better by emphasizing convenience and service.
Anthony Yip, vice president, Gaming Product & Planning, says his customers consider their time spent at Mocha’s venues as “entertainment”.
“Lots of people don’t want to go to the casino because the service isn’t always there. In the casino, if you’re not a VIP it’s not easy to get service. But here they know they will be taken care of. The Chinese need the ‘face’. They really enjoy that. And we’re not really tough on [return to player]. Because these are not one-time players. We offer them something a little more to make them feel better.”
Union Gaming’s Grant Govertsen expects visitation to Macau to increase 10-15% this year to 32 million, and he projects that “highmargin mass-market gross gaming revenue” will grow at double that rate, implying a mass market that will be US$2.5 billion to $3 billion larger than it was at the end of 2011. Growth in slot revenues could easily exceed $450 million.
Deutsche Bank analysts Carlo Santarelli and Kelly Knybel estimate a doubling of total Macau GGR over the next five years to US$62 billion. Conceivably, all the projects in the current Cotai pipeline, of which there are seven (including MGM’s and SJM’s, which have yet to be granted land approvals), could be open within this time frame. But this presumes a pace of development which itself is a puzzle of many complex pieces. How they ultimately fit together depends on the limitations of the labor market and the willingness of the powers that be to address that by taking on the politically volatile issue of immigration. A lot depends also on the speed at which an already overburdened transportation infrastructure can expand to meet the market’s needs. There is finally the question of how tightly the local government, and ultimately the central government in Beijing, will try to control growth in order to forestall the possibility of social disruption.
Assuming Cotai progresses as envisioned—seven new resorts between now and 2017—Macau could be a 24,000- plus machine market easily worth US$5 billion at current average daily win rates.
Mr Crisafi believes slots could be 10% of the overall market by time. “People are going to start looking at time on device, the entertainment factor,” he says.
He is not alone in this view.
“We’re more excited about the massmarket growth story than VIP,” says Mr Govertsen. “You will see very healthy doubledigit growth rates into the foreseeable future, the next five to 10 years, the benefits of which will accrue not only to the operators but to the suppliers. We’re talking about many tens of thousands of slot machines.”