Macau Diversifies in the Face of Declining Revenues

In a determined effort to revive its sagging fortunes following 12 consecutive months of declines in gaming revenue, Macao – Asia’s leading gambling mecca – has turned to rapid diversification into the entertainment and leisure sector to lure mass-market customers, and veer away from its traditional reliance on high-roller clientele.

Gambling revenue in May plunged 37 percent from a year earlier, according to data from the Macao SAR’s Gaming Inspection and Coordination Bureau, while 2014 marked the first full year of annual decline since records began in 2002.

Investment in the non-gaming sector is now a “requirement” for the gaming industry, and also “the cost of staying in business in Macao”, said Aaron Fischer, an analyst with Hong Kong-based investment group Credit Lyonnais Securities Asia (CLSA) Ltd.

Galaxy Entertainment Group (GEG) has taken the lead in taming the headwinds, lending a boost to the casino operator’s non-gaming appeal as it launched the second phase of Galaxy Macau and a new property, Broadway Macau, last Wednesday.

“We have entered a new era when the growth pattern in the past decade won’t work today. It means the absolute advantage of the number of gaming tables doesn’t necessarily guarantee better business performance. That’s why we have put a lot of non-gaming elements into the resort and doing it phase by phase,” said GEG Vice-Chairman Francis Lui Yiu-tung.

GEG’s non-gaming appeal covers six new hotels, including luxury brands Ritz-Carlton and JW Marriott, as well as shopping and dining outlets. The 3,000-seat Broadway Theater, a hawker-style street market and the world’s longest “sky top” river ride are some of the key entertainment facilities on offer at the complex.

Lui said he expected non-gaming revenue to grow at double-digit pace and eventually contribute up to 50 percent of the group’s total revenue in two to three years.

Last year, the non-gaming sector contributed only 3 percent, or HK$1.5 billion, to Galaxy Macau’s total revenue, while VIP gaming accounted for slightly over two-thirds, according to GEG’s annual report.

GEG was one of the better performing casino operators in Macao last year, posting a 9-percent rise in group revenue to HK$71.8 billion.

The central government’s ongoing anti-corruption campaign has driven high rollers away from the VIP rooms – the main driving force behind the revenue slump.

Galaxy Macau’s new property was granted 150 new-to-market gaming tables by the government, and plans to allocate most of them to the mass market. The casino would allocate the tables based on where the growth opportunities are, said Richard Longhurst, director of operations at Galaxy Macau.

According to a report in the UK’s Financial Times, mass-market gamblers from the Chinese mainland, who do not require free hotel rooms or pay commission to agents as the big spenders would, can bring margins four times higher than those of VIP gamblers.

For the non-gaming side, the mass-market visitor’s potential is yet to be tapped. Despite the gaming slump, Macao saw the number of visitors from the mainland surging to almost 70 percent of total arrivals – with an increase of 14.1 percent last year to 21.3 million – according to the Statistics and Census Service of Macau.

Galaxy Macau hopes to attract more than 65,000 visitors daily to its property, according to Kevin Clayton, chief marketing officer of GEG.

“There’s an emerging mid-income market on the mainland. It’s now increasingly affordable for people to travel overseas. In terms of tapping the mid-income market, we are only scratching the surface,” he said.

During his visit to Macao in December last year, President Xi Jinping urged the city to “nurture new growth areas” as over-reliance on the gaming sector posed challenges to Macao’s future growth.

The Macao government too wants the gaming industry to diversify and transform the world’s top gambling destination into a Las Vegas-style “world center for leisure and tourism”.

However, compared with Las Vegas, it seems Macao still has a long way to go to achieve its goals.

Statistics from the State Gaming Control Board in Nevada, where Las Vegas is located, show that gambling accounted for 45.1 percent of the state’s total revenue in 2013, while non-gaming activities contributed just 10 percent of Macao’s total casino revenue.

“The new resort offering underlines the group’s commitment to help Macao fulfill its potential as a diversified economy and to develop and nurture local talent and local culture,” said GEG Chairman Lui Che-woo.

“When visitors come to Macao, they are not only seeking to participate in gaming. This is a major sea change in the ecosystem of Macao,” he said.