Promotion Wars

With customers sidestepping Macau and spending less on the gaming tables, casino operators have been forced to enter into a rough and tumble competition in order to attract new clients and gamblers. Operators have thus embarked upon a promotion war. From discounts on room rates to free meals to shopping vouchers to better loyalty programmes everything has been thrown at Macau visitors. Never have the casino operators here spent so much on promotions as a share of gaming revenues as today. This, despite casino revenues suffering the biggest decline ever.
In the last quarter of 2014 and the first quarter of 2015, the promotional budget of casino operators in Macau reached, in both quarters, 10.2 per cent of all mass gaming revenues, a record since 2013. During the boom years, operators were investing around 9 per cent of their mass revenues in customer promotions, Deutsche Bank data reveals (the German bank used as a sample for Macau market figures from Wynn, Las Vegas Sands and Melco Crown).
In the first quarter of this year, these three casino operators collected US$2,011 million in mass gaming revenues in Macau and gave to clients US$206 million in promotions, 10.2 per cent of the former. A year prior (1Q2014), casinos amassed US$2,504 million, allocating US$220 million to promotional allowances. This in the space of a year, mass revenues dropped 20 per cent, with cuts in promotions just 6 per cent.
Free ride
This means that the share of promotions in revenues is climbing. The promotional allowances are the difference between gross and net revenues in casinos, and being a market average hides the differences between operators. Data from companies compiled by Deutsche Bank shows that historically Wynn Macau is the operator spending most on promotions, but it’s Melco Crown who recently increased its spending the most in customer promotions. Promotional allowances at Wynn Macau reached 14.5 per cent of mass gaming revenues in the first quarter. This compares to 9.1 per cent at Las Vegas Sands and 10.2 per cent at Melco Crown. The operator run by Lawrence Ho and Australian mogul James Packer heavily increased its promotions from an average US$45 million per quarter to US$57 million in the first quarter of 2015, pushing the promotional share of revenues from 7 to 10 per cent.
With Macau preparing for a wave of new casino openings in the upcoming months – take Melco’s Studio City, for example – and with Galaxy Phase II already online, promotion wars are only likely to increase in the future. Especially, with soft visitation numbers and gaming revenues still pressured by Beijing’s anti-corruption crackdown.
Price sensitive
The mass market is one of the promotional battlefields, as the mass client is likely to be more price and promotion sensitive than a high roller when it’s time to choose a property to play or stay in, in Macau.
While several casino operators told Deutsche Bank analysts that they’re sensing a current stability in the mass market, the figures are still in correction mode. Since February, mass gaming revenues have been dropping by around 30 per cent per month (on a year-on-year basis).
Average monthly mass revenues have been running around or below US$1.2 billion since October of last year, 25 per cent less than the average of the boom years (US$1.6 billion).
Together with promotions, casinos here are also fighting a price war amongst themselves. Recent data revealed that some high-end casino hotel units are charging half the room rate of last year. Occupancy rates are also dropping fast from a peak of around 90 per cent to a current 60-70 per cent level. With more units coming online up to 2017, some investors are worried that the supply will be much higher than the demand forcing casino operators to slash prices with obvious negative implications in revenues and profits.
Multiplier effect
Promotional allowances work in gaming the same way loyalty programmes in other industries like airlines or retail chains work. Companies use them to attract new clients and reward their loyal ones as an incentive for them to spend more. In an ultra-competitive market like Macau it is no surprise that promotions are on the upswing.
Academics believe promotional allowances are a vital tool for boosting revenues in the casino industry. Toni Repetti, an expert in gaming at the University of Nevada, Las Vegas estimates that for each dollar invested in promotional allowances there’s a significant increase of US$ 4.53 in gross revenues, US$3.53 in net revenues and US$ 1.29 in gross profit.
Not all operators use the concept of net revenues (gross revenues minus complementaries) in their accounts and this is an issue of debate in the gaming industry. “Even though many gaming operators show complementaries in gross revenue, others argue that because no specified revenue or cash is generated, they should not be included in the income statement but given as a footnote”, writes John Mills also from the University of Nevada in an academic paper. Mr. Mills says that operators hold as much as 25 per cent of their hotel rooms open for their special gamblers and that at least 15 per cent of total revenues emanating from high rollers are non-cash promotions for rooms and other services.