Inside Asian Gaming

March 2015 inside asian gaming 7 Cover Story as the mass market supplants the once-dominant VIP segment and Chinese tourists become more discerning in their choice of travel destination. In 2014, Macau witnessed its first year-on-year decline in gaming revenue since the arrival of foreign-operated casinos a decade ago. A dramatic fall-off in VIP play was the main cause. Historically the source of two-thirds of Macau’s world-leading gaming take, the high end was pummeled by slowing growth in the Chinese economy and an intensive crackdown by the central government on corruption, graft and capital flight. Analysts expect an even greater percentage decline this year. As Mr Ho put it, “It’s time to rebalance” the market from its reliance on VIP revenue. “As a company, we love the mass segment; the customer base of ours is a much higher margin business,” he said. “With the rise of the middle class in China and their consumption, that’s really the future of Macau and all gaming markets.” The market has actually been rebalancing gradually toward the mass market since the end of 2011. VIP baccarat’s share of total Macau gaming revenue peaked at 74% in the second and third quarters of that year, and has been declining ever since, with its growth consistently outstripped by that of the mass market. Yet the mass market also began to falter towards the end of last year, with mass table revenue falling 16% year on year in the fourth quarter. Mass revenue was up 16% in the third quarter of 2014, and prior to that had enjoyed an unbroken run of growth ranging from 29% to 42% every quarter since the beginning of 2011. VIP’s decline began earlier and is much more pronounced, with the 29% fall in revenue in the fourth quarter marking the third-straight quarterly decline. There were several well-documented causes for the decline in mass market revenue. A total smoking ban came into effect on all of Macau’s main-floor gaming areas in October 2014, resulting in a 10-15% reduction in mass revenue, estimates Deutsche Bank’s Karen Tang. (The total ban superseded a 2013 requirement that 50% of the floor space at every casino be designated non-smoking areas). In response to the ban, casinos have reclassified some of their premium mass areas as VIP in order to allow players to continue smoking. Consequently, some of the reported decline in mass revenue is actually a result of the reclassification, adjusting for which, Credit Suisse analyst Kenneth Fong calculates that mass revenue actually only fell 10% in the fourth quarter, while VIP was actually down 32%. The crackdown on illegal UnionPay card transactions that began in May last year has also adversely impacted mass revenue, particularly at the premium mass end. The China state- backed debit card had been widely used to circumvent China’s stringent currency controls—a role performed by junkets in the VIP segment—by mainlanders making bogus purchases in Macau, usually at jewelry or pawn shops, and in lieu of goods receiving the equivalent sum in cash minus a small commission to the vendor. Karen Tang wrote last May that illegal UnionPay transactions amounted to US$6 billion annually, equivalent to 12% of Macau’s mass-market chip sales. According to Inside Asian Gaming ’s sources, though monitoring has been stepped up and illegal UnionPay transactions have been curtailed, they have not yet been completely wiped out. Thus, the full impact of the There’s more to the non-gaming mantra than table allocations, though. The operators have recognized their businesses will increasingly depend on the strength of their non-gaming offerings, as the mass market supplants the once-dominant VIP segment and Chinese tourists become more discerning in their choice of travel destination.