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The future for Asia’s IRs: More, bigger and better amenities

Asia’s land-based sector continues to attract strong investor interest, both from within and outside of the region, with new markets and opportunities emerging at a breakneck pace.

In this edition of Asia Gaming Briefings, our focus piece takes a broader brush look at some of the implications of this proliferation of new properties and potential considerations for investors. For example, there has been considerable debate over whether bigger is better. As operators jockey for a position in Japan, investment pledges for a coveted license are running at about $10 billion, while around the region, from Saipan, to Singapore, to Vietnam, the mega resort seems to be the preferred operating model. We ask why and more importantly, will this trend continue as the market develops.

In another of our featured items, we consider the merits of the various jurisdictions. Does Macau risk losing any of its clients to Japan, or will the Philippines take a greater slice of Singapore’s pie? The article considers how much more expansion the Asian market can support, while looking at which locations are most at risk from cannibalization.

As new resorts are built out, operators are also faced with the question as to what will appeal to clients in terms of non-gaming amenities. As they try to reach a broader and perhaps younger audience, what is going to bring in the crowds? In Las Vegas, it has been the club scene that has seen stellar success and there are signs now that operators in Asia are beginning to import that model. Marina Bay Sands is bringing in the world-renowned Marquee Club from next year and Melco Resorts & Entertainment hosts the Pacha brand.

Our piece looks at the potential for nightclubs in the region and what ingredients need to be thrown into the mix to create a must-see destination.

Lastly, no amount of investment in glitzy facilities is worth the money if you can’t keep the customers coming back for more. And, at the end of the day, one of the key differentiating factors is likely to be customer service. Marketing expert Sudhir Kale examines how operators need to drive employee engagement to ensure they are reaching their full potential when it comes to welcoming clients. He argues that simply raising wages, or offering more perks, is not the answer to ensuring your staff buys wholeheartedly into the project.

Will nightclubs make Asia’s non-gaming revenue dance?

Marina Bay Sands is bringing one of the world’s top nightclub brands to Singapore next year, becoming the latest of the region’s major IRs to add clubbing to the entertainment mix in the hope of duplicating the success of Las Vegas’ vibrant night scene.

The property, which is owned by Las Vegas Sands, is teaming with the Tao Group to open Asia’s first Marquee Club. The massive venue will span over 3 floors with 70 ft. high ceilings and an 8-armed Ferris Wheel within its premises.

It follows Melco Resorts & Entertainment in betting on these type of destination venues. The Macau-based operator opened Club Cubic in its City of Dreams resort in 2011 and brought over the world-renowned Pacha Club to its Studio City resort in 2016, while Galaxy Entertainment reopened a revamped China Rouge also in that year. Melco also incorporated the Pangaea Ultra Lounge, by Michael Ault, into its City of Dreams Manila.

Nightclubs have become an increasingly important revenue driver in Las Vegas over the past decade, since the opening of Wynn Resorts’ XS in the Encore Las Vegas in 2008. They have helped change the demographic of visitors to the U.S. gambling hub, with 38 percent of visitation coming from millennials, according to the Las Vegas Convention and Visitors Authority.

Seven of the top 10 highest grossing nightclubs in the country are along the Las Vegas Strip, according to Nightclub and Bar Media Group. XS nightclub at the Encore brought in more than $100 million in 2014 and so did Hakkasan with it’s operation at MGM Grand. The Marquee at the Cosmopolitan is packing them in with a yearly revenue of $80 million.

A spokesperson for Marina Bay Sands said the time may now be right for these clubs in Asia.

“There has been a lot of growth in the entertainment scene in Asia with the entry of prominent music festival brands such as Ultra, of which we have been a key sponsor of since its debut in 2015,” she said. “Asians are also well travelled and discerning, having experienced a high level of hospitality and entertainment overseas in cities such as London and New York. Partnering with the TAO Group on bringing in world-renowned brands like Marquee to Marina Bay Sands at this stage makes a lot of sense, from a business and programming perspective.”

However, whether a nightclub is a wise investment for an IR is a complicated question. John Raczka is a senior entertainment executive who introduced Pacha and Pangaea to Asia while overseeing entertainment development for Melco’s Studio City Macau and City of Dreams Manila. He says there are many variables needed to line up for a club to be successful.

“ No matter how cool the design of a club might be or its scale, it’s like making a motion picture—you will not know for sure how well it will perform, or for how long, until you open it because of that intangible component,” he said.

Still, he points out that location is critical. Clubbers like to have convenient options so that if they do not see a crowd they like, or the genre of music playing at one club, they can quickly get to another venue for a fresh crowd to assess.

Even in big cities, critical mass of social real estate gives a competitive advantage. For example, in Hollywood, you have Dream Hotel with its roof pool bar flanked by Tao on one side and Beauty & Essex on the other—it’s a quad social play providing multiple trendy environments within which to lodge, dine, drink and dance. An IR can mimic this model under one roof through diversity of design, smart placement and functionality, he says.

Raczka points out that in the absence of neighbors, sheer scale can make a difference in pulling in the crowds to a standalone venue.

One-stop shops

Marquee’s sister club, Tao Chicago will open in September with a $25 million price tab for fit out, including a sunken dining room, bar, lounge and upper-level club adorned by a 16-ft. tall statue of Quan Yin, Buddhist deity of compassion, and a 10 ft. Japanese bell.

“These mega venues are not targeting club jumpers, but are rather offering one-stop destinations for an entire evening so elaborate, so good in food quality and so different in interior design that you will not want to leave,” he said.

MBS is confident its new club will have these winning characteristics.

“We believe Marquee Singapore will be a game changer in the nightlife scene in Asia with its reputation and dynamic setting in Marina Bay Sands,” she said. “Set to be one of the largest clubs in Singapore, Marquee will house the most technologically advanced lighting and sound system in the region.”

In a city which charges locals to gamble through a casino entry fee, adding a destination with features that will appeal to the local market is also key, supporting revenues during tourism downturns.

There are few available figures as to how well existing clubs are performing for their owners in Asia. In Macau, non-gaming revenue is rising, but at 12 percent of the total it’s still a far cry from the 65 percent level generated by Las Vegas. Analysts at Morgan Stanley said in a report earlier this year that they doubted Macau would ever generate this level of nongaming revenue.

Macau’s Club Cubic, owned by the Hong Kong-listed Luk Hing Entertainment, is one of the few to provide a detailed business review of its actual club operations. Last year it tweaked its strategy to include a higher number of small-scale events, which helped drive visitation to 157,000 from 134,000 the prior year. However, these smaller events attracted less sponsorship and had a negative impact on consumer spending which dropped by HIK$100 to HK$700 ($89.2) in the year.

So will Asia IR’s experience Las Vegas caliber success in nightclub revenues?

Entertainment fusion

Raczka says in some select markets, like Singapore, where you have a rich City State with a high density of wealthy millennials and socially active professionals? Absolutely.

“Are you going to sell 5-figure USD bottle service tables in Manila weekly? No.”

However, you do have clubs in Las Vegas who have had the highest-grossing independent restaurant in the US as part of their club footprint.

“So fusing a well-designed club with a strong restaurant offering vs. a pure club proposition can potentially be a stronger business model depending on the market and execution,” he says.

This type of entertainment mix is also being deployed by MBS.

The operator worked with the Tao Group to launch the LAVO Italian Restaurant and Rooftop Bar in January this year and plans more offerings.

“We will be opening new F&B concepts such as famed New York milkshake and burger joint Black Tap in Q3 2018, and Marquee in 2019. Marquee Singapore will be part of a new multiconcept dining and entertainment destination.”

Asia’s emerging casino markets question whether size matters

When the 10.5 million-square-foot Venetian Macao opened its doors in 2007, it upped the ante on the scale of casino developments and helped inspire Singapore, Korea and others to undertake major IR projects.

More than a decade on, and with Japan poised to follow a similar path, Asia’s emerging casino markets are left wondering if the IR is now the only game in town, or if a multi-license, boutique approach to development is still viable.

“[Emerging markets] are generally understanding that the size of investment which they can attract is not just a function of the market opportunity, but also of the relative uniqueness of a casino license,” David Green, former gaming practice director with PricewaterhouseCoopers in Macau and founder of leading gaming consultancy Newpage Consulting, told AGB.

The IR approach to casino regulation has generally proven to be the most palatable to regulators, too. “Most new Asian markets are conscious of the downside associated with disordered gaming, the potential for the industry to be infiltrated by organized crime... and the political will required to regulate an industry comprising many properties and licensees,” said Green.

According to Steve Karoul, president and CEO of boutique casino consulting company Euro-Asia Consulting, LLC, IRs have been the preferred choice for a number of reasons, not least political ones.

“Casino gaming is a very sensitive subject and therefore it is much easier for government legislators who normally depend upon public opinion and votes for re-election to choose to promote a less contentious concept called the Integrated Resort,” he told AGB.

“It has a more neutral and more socially acceptable tone than casino gaming, which comes with all of the negative connotations associated with gambling, such as problem gaming, under-age gaming, increased crime, money laundering, etc. In addition, IR’s will serve a broader segment of the overall market than a facility only focused on casino gaming.”

Little wonder

But while these factors have helped push newly-regulating jurisdictions towards the IR approach, it is not the only option. Richard P Loughlin, director of operations at the Asia Pacific Gaming Management & Consultancy acknowledges that while IRs are a “much easier sell from the legislators’ perspective”, there is still room for smaller, boutique casinos to thrive.

He pointed to the more than 40 casinos in Macau, but also to the Cambodian market which combines a monopoly IR in the capital Phnom Penh with tens of licenses issued elsewhere in the country.

The coastal city of Sihanoukville, for instance, has around 30 casinos in operation, with tourist arrivals increasing rapidly as a result. During 2017, the city recorded 470,000 foreign visits, of which 120,000 were from China - double the 2016 figure.

“I think Cambodia is a fine example of how the country is benefiting from the smaller scale properties,” Loughlin told AGB. “For emerging markets like this it is unlikely to see top tier operators making the investment that comes with an IR, which in turn leaves plenty of opportunity for smaller properties to make headway.”

Karoul agrees that in certain circumstances, a larger number of smaller boutique casinos “may make more sense than a larger IR,” especially in jurisdictions lacking the density of population and ease of access required for an IR to succeed.

But there are problems associated with the multi-license approach as well, particularly in terms of enforcing bans on locals, collecting taxes, and maintaining the value of a casino license.

These factors are likely considerations within those markets that appear to be turning their back on the boutique approach altogether. Vietnam, which operates approximately ten small casinos dotted around the country in which only foreign nationals may gamble, is now placing its chips on a handful of large IRs, including Suncity’s $4 billion Hoiana project.

Healthy competition?

Perhaps the only factor likely to turn the tide against the development of larger IRs is the risk of cannibalization. If the market were to become saturated, particularly when Japan’s IRs come online in the 2020s, there may no longer be an appetite to build large developments in smaller emerging markets.

Green believes such a reality is still some way off. “I don’t see any indications that saturation of the east Asian market is a risk; certainly pay-back may be a bit slower than was the case with early entrants in Macau post-2002, but there is still enough optimism and demographic support for continuing substantial investment in IRs,” he said.

Indeed, Loughlin noted that fear of cannibalization is nothing new; there were similar worries Cotai would kill off the Macau peninsula some 15 years ago, and more recently concerns Singapore would take a significant chunk of revenues away from Macau, but neither came to pass.

Karoul, however, sounded a note of caution over the loyalty of a limited number of VIP players in the region which is not growing at the same rate as new developments. He said operators, regardless of the size of their casino, will need to market more intelligently and lean on big data to build sustainable growth.

“I personally do not think that bigger is necessarily better,” he said.

Terms of engagement?

Sudhir Kale*

With competition for customers in jurisdictions such as Macau intensifying, casino operators are realizing the vital role played by their employees in customer retention, but the strategies being used to foster employee engagement, such as higher salaries, are largely ineffective.

To understand and foster employee engagement, some casino operators in the region carry out regular surveys of employees, and some organizations are also carrying out short “pulse” research. As well intentioned as the Voice of Employee initiatives are, they often yield erroneous findings that provide little value in exchange for all the expense and time that management devotes to understanding engagement.

The reason for poor returns can be attributed to four causes: (1) Lack of understanding of the employee engagement concept; (2) Poor operationalization of employee engagement in surveys; and (3) Low reliability and validity of the research instruments; and (4) Lack of benchmarking.

Very often surveys are carried out with management having less than a solid understanding of what employee engagement actually means. The meaning of employee engagement is ambiguous among both academic researchers and among practitioners who use it in conversations with clients. Several organizations equate employee engagement with employee satisfaction or with an employee’s tenure with the organization. While employee satisfaction and intent to stay with an organization are often the results of engagement, they do not equate with engagement.

The academic research often views employee engagement as a positive, fulfilling, work-related state of mind that is characterized by vigor, dedication, and absorption. The Gallup Organization defines engaged employees as “those who are involved in, enthusiastic about, and committed to their work and workplace.” There exists a fair degree of consensus among academic researchers as well as practitioners that engaged employees exercise more “discretionary effort” in performing their jobs. Using variants of each of these definitions, CustomInsight LLC provides the following composite definition, “Employee engagement is the extent to which employees feel passionate about their jobs, are committed to the organization, and put discretionary effort into their work.”

As practitioners within the gaming industry, before you invest any time in measuring customer engagement, ask yourself specifically whether you want to invest in assessing employees’ vigor, dedication, commitment, and discretionary effort, and if so, what do you intend to accomplish once the measurement has been undertaken.

Poor Operationalization

Bad choice of questions is the second problem associated with employee engagement surveys. Very often, questions within the survey assess employee satisfaction or happiness, not engagement. The link between employee happiness and productivity is not as strong and nowhere as ubiquitous as that between engagement and productivity or profitability. Also, many questions assess what I call the antecedents of engagement, not engagement itself. For example, the Gallup Organization uses “having a friend at work” as a precursor of engagement. Do all employees feel more engaged if they have a friend at work? More importantly, what can an organization do to ensure that every employee has a friend at work? Precious little.

It is perfectly okay to measure the antecedents of engagement so long as you are extremely confident of the strong causal relationship between the antecedents and engagement, and where the variables leading to engagement are within the control of the organization. Very often, employee traits and personality contributes as much to engagement as organizational climate and culture. In such situations, judicious recruitment to ensure cultural fit between the organization and the employee will yield more fecund results than carrying out elaborate engagement assessments.

Reliability and Validity

The third major issue with regard to employee engagement surveys concerns the reliability and validity of the survey instrument. Reliability, simply defined, is the degree to which the result of a measurement can be depended on to be accurate. Imagine your doctor making decisions regarding diagnosis of your sickness based on defective or flawed thermometers and glucometers. Yet, management of many gaming companies typically makes strategic decisions regarding employees based on unreliable survey instruments. Even worse, external consultants rarely, if ever, provide reliability figures on the scales and indexes they develop to assess employee engagement.

While reliability assesses the dependability of a survey questionnaire to provide consistent results, validity is an index of whether or not a particular instrument measures what it claims to measure. Just search the Internet for “employee engagement surveys” and you will find scores of surveys, all very different in content and wording, yet supposedly measuring the same concept. Surely, not all these surveys are valid instruments with which to measure employee engagement!!! Going back to the physician example, while reliability tells you about the dependability of thermometer readings, validity concerns itself with whether a glucose tolerance test or a colonoscopy is an advisable diagnostic test for ascertaining diabetes. Unfortunately, management never quizzes outside consultants or in-house research staff on the reliability and validity of the research that is carried out. Decisions with far reaching consequences are routinely made based of unreliable and invalid research.

Benchmarking

The final major drawback of many employee engagement studies is absence of benchmarking or using wrong yardsticks for benchmarking. Imagine how useful just the number associated with your IQ would be if you had no idea about how intelligence is distributed in the general population or, more importantly among your cohorts. Very often gaming companies fail to benchmark their engagement scores with other comparable gaming companies to get a sound understanding of their performance on the engagement dimension. Sometimes, industry consultants provide a so-called industry average (heavily biased in favor of hotel properties) which provides little insight for regional casinos that may be too small or based on reservations. It makes more sense, for example, for Foxwoods to compare themselves with Mohegan Sun, than with the “industry average” for Las Vegas or Atlantic City.

Proper benchmarking allows realistic comparisons of performance and provides actionable insights for gaining competitive advantage through employee engagement. A survey without benchmarking tells you nothing about your relative performance in comparison with other similar enterprises which face similar challenges.

Recommendations

Employee engagement provides valuable information on the employees’ commitment to your organization and the effort your employees put into their jobs. Engagement has been shown to relate positively to productivity, customer satisfaction, organizational profitability, and shareholder return. Engaged employees Say (good things about the organization to fellow employees and customers), Stay (with the organization longer compared to employees that are less engaged), and Strive (for better performance and effort). Investing in assessing and furthering employee engagement definitely yields handsome returns.

However, most organizations do a less than effective job of measuring and benchmarking employee engagement. There is scant regard for identifying the right antecedents of engagement, and the reliability and validity of the survey instrument are almost always in question. Decisions made on the basis of flawed employee engagement surveys can be disastrous both for the employees and for the organization. To pre-empt disasters from happening, organizations need to be aware of what exactly they are trying to measure and change, and how reliable and valid the survey and pulse instruments are. Correctly designed and properly administered and benchmarked surveys of employee engagement can alert management to workforce health and productivity issues that would otherwise lie dormant and create a serious competitive disadvantage.

*Sudhir H. Kalé, Ph.D., is Founder and CEO of GamePlan Consultants, a company that provides management and analytics consulting to casinos and clubs. He is also Honorary Professor of Marketing at Bond University. Sudhir has decades of experience in designing surveys and carrying out sophisticated customer and employee research across many different cultures and geographies. He has consulted with leading clubs and casino operators on five continents. You can reach him at skale@ gameplanconsultants.com.

Beyond Macau: how Asia’s casino space is shaping up in the 2020s

With multiple new destinations opening up over the coming years, Asia’s casino space will have a very different feel in the 2020s.

Of course, new regulation and developments do not occur in isolation. Existing markets - not least Macau - will be watching very carefully for both competitive threats and potential opportunities.

As the landscape develops over the next decade, it will become increasingly important for emerging markets to stake a claim to a particular segment. AGB takes a closer look at Asia’s key emerging markets and how each is positioning itself.

JAPAN

With Japan’s casino bill finally receiving the green light, the real work now begins in the bid to unlock a potential $25 billion market.

The size of Japan’s domestic market and its pulling power for tourists makes it the most likely to be able to compete with Macau on both mass market and VIP, although it will be hindered on the latter by the prohibition of junket operations. This issue could potentially be solved with offshore settlement and credit arrangements.

The consensus among Macau’s gaming concessionaires - all of which will likely bid for a license in Japan - is that the opportunity outweighs the threat.

“I would not be worried on cannibalization but it will make the market a lot more competitive,” said Richard P Loughlin, director of operations at the Asia Pacific Consultancy (Macau) Ltd., pointing to how IRs in Singapore and the Philippines did not negatively impact Macau revenues.

CAMBODIA

Cambodia has quietly carved itself a niche with strong performance in the Chinese VIP segment, while also serving growing customer bases from Vietnam and Cambodia. NagaWorld, the IR which holds exclusivity in Phnom Penh, reported a 140 percent year-on-year uptick in VIP rolling turnover for 2017 to $21.1 billion.

With taxes from the booming sector pumping around $50 million a year into government coffers, there is an appetite for further expansion. However, long-term growth could depend on maintaining strong relations with China.

“Cambodia is a potential competitive threat [to Macau], but the longevity of the threat may depend on the durability of the current political regime, and the strength of its relationship with China,” David Green, former gaming practice director with PricewaterhouseCoopers in Macau and founder of leading gaming consultancy Newpage Consulting, told AGB.

SINGAPORE

Genting Singapore, Resorts World and Marina Bay Sands have been hit by Beijing’s gambling crackdown, albeit not to the extent of Macau.

However, the outlook looks stable if not spectacular. “Singapore is unlikely to expand further; it opened pretty much as a mature market in 2010, and has likely seen the best of its growth,” said Green.

The city state has been helped by strong tourist numbers. For 2017, tourist arrivals were up 6.2 percent to 17.4 million, with China now the top source of tourists.

Singapore’s IRs have tended to perform strongly on the non-gaming side, while the market should be better insulated against Beijing’s unpredictability than many as it remains the primary destination for VIPs from Indonesia and India. Building upon these strengths will be the key to further growth.

VIETNAM

Like Cambodia, Vietnam is taking aim at the Chinese junket market with Suncity’s $4 billion Hoiana project set to open its first phase next year.

The casino will be Vietnam’s largest, and marks a change in strategy with the market also set to trial domestic gaming after relaxing a long-standing ban.

“Vietnam offers potential as both an opportunity and competitive threat, if it can offer an attractive, stable and regulated alternative, and if locals are allowed to enter en masse,” said Green.

SOUTH KOREA

Political tension with China and its impact on visitor numbers has meant Korea’s burgeoning casino market is still waiting for takeoff.

Given the ban on domestic customers, the reported ban by Chinese authorities on tour groups travelling to Korea hit the sector hard; Paradise City reported an 8.6 decline on gaming revenues for 2017.

New regulation and more investment is needed to drive growth into the 2020s, although this may not be forthcoming.

“Korea may offer a couple attractive properties, but the market is substantially unregulated, and the risk associated with its proximity to North Korea has scarcely diminished,” said Green.

PHILIPPINES

The Philippines has enjoyed impressive growth of late - gross gaming revenues were up 13.8 percent year-on-year for 2017.

Its revenues are better diversified than many competing territories, split fairly evenly between VIP junkets, mass market and electronic gaming machines.

In theory, this provides plenty of room for growth, particularly on the VIP side given the Philippines’ close relationship with China.

However, questions still remain over the stability of Rodrigo Duterte’s government, and the largest operators have so far steered clear. This may need to change if it is to emerge as a leading destination.

“The Philippines is unlikely to regulate its way to success in attracting established IR operators, especially from the US. Melco is there, of course, but it is difficult to see Nevada licensees ever following,” said Green.