In civil aviation there’s a concept known charmingly to physicists as ‘coffin corner’. It’s not good news, as even a lay person can guess. We’re paraphrasing and simplifying, but essentially a pilot is always trying to maintain an air speed that’s safely above stall speed but not so high that it would cause the aircraft to become uncontrollable or even break up. But as the aircraft’s altitude increases, the difference between the stall speed and the maximum speed narrows to a critically small margin. That’s coffin corner.
You’re wondering where we’re going with this in relation to casino gaming. Here goes. Las Vegas Sands Corp (LVS) is understandably pursuing as much high margin mass market business as it can get its hands on in Macau because it’s more profitable than VIP play, where it generally has to share with the junkets. The company also understands, however, that in a market 70% driven by high roller revenues last year, it cannot afford to ignore VIPs. To do so might invite LVS’s Macau subsidiary, Sands China, to enter its very own gaming revenue equivalent of coffin corner.
Here’s the problem. Yes, The Venetian Macao increased rolling chip volume by 23.3% year on year in the first quarter of 2011 to US$12.4 billion. But that’s in a market as a whole where VIP gross revenues grew 67.6% in the same period. The VIP gross market-wide was MOP42.57 billion (US$5.32 billion) in 1Q 2011, compared to MOP28.76 billion in 1Q 2010 according to the local regulator, the Gaming Inspection and Coordination Bureau (DICJ). Rolling chip volume (i.e. turnover) is not the same thing as GGR (revenue), but there is a correlation between the two.
Underperforming the market in the VIP segment might not matter much if Sands China were correcting its market ‘air speed’ by outperforming its peers in the mass segment. It isn’t. The Venetian managed to put on 16.6% in gross revenues year on year in 1Q 2011 and Sands Macao 13.6%. Mass market GGR across the whole of Macau grew 29.2% year on year in 1Q 2011.
Here’s the arithmetic. GGR from all games of fortune in 1Q 2011 was MOP58.52 billion according to the DICJ. Strip out VIP baccarat (MOP42.57 billion) and slots (MOP2.72 billion) and you’re left with MOP13.23 billion for mass GGR. In 1Q 2010, total GGR was MOP40.95 billion, less VIP baccarat (MOP28.76 billion) and slots (MOP1.95 billion), leaving MOP10.24 billion in mass market gross.
SJM—that’s the supposedly VIP-obsessed SJM that effectively wrote the book on junket operations in Macau—may actually be out-marketing the supposed mass market specialist LVS. Although in March this year only 28% of SJM’s gross came from the mass market (compared to Sands China’s 62.4%), in real terms it’s a big chunk of money. Mass market play brought in HK$180.77 million for SJM that month, compared to HK$106.06 million in the same period for Sands China. While LVS can point out that SJM has much greater market coverage, in practice, most of SJM’s mass market play must be generated in a handful of directly managed properties where it gets the whole economic benefit of the revenue—namely Grand Lisboa, Oceanus and to a lesser extent Jai Alai—all on the Macau peninsula.
Even The Venetian’s excellent positioning next door to the Lotus Bridge border crossing to Zhuhai won’t be enough to guarantee a captive mass market audience once Galaxy Macau opens on 15th May. Galaxy also has a proven track record in cultivating junkets that could impact on any attempt by LVS to ramp up its VIP performance at The Venetian’s Paiza Club and The Four Seasons’ Plaza casino. Any such LVS courtship of junkets could be hindered by the current uncertainties created by the United States Securities and Exchange Commission’s inquiry into Sands China.
The Chinese people who run junket operations in Macau and their customers are not fools and it would be commercially dangerous were any Macau operator to treat them as such. They can distinguish between warm words and actual warm deeds. Simply declaring that junkets are your market partners is not the same as engaging with them to build a mutually beneficial relationship. Junkets have noted the somewhat idiosyncratic way in which Sands China seems to be approaching them. They have noted in particular the public announcements of the company and of LVS Chairman Sheldon Adelson.
In May 2010, in an 8K filing to the United States Securities and Exchange Commission, LVS said: “At the same time, we are focused on growing our share of the premium players segment via direct marketing efforts and by leveraging our Paiza brand and luxury amenities that enable us to differentiate our properties from those of our competitors, who typically rely more on Gaming Promoters for their VIP players. To attract premium players, we offer them accommodations in our exclusive Paiza suites and Paiza Mansions, complete with private gaming and concierge services. Our management estimates that our premium player table revenues generate a gross margin that is approximately 1.0 to 1.5 times higher than our typical VIP player table revenues.”
In March this year at the J.P. Morgan Gaming, Lodging, Restaurant & Leisure Management Access Forum in Las Vegas, Mr Adelson said one of the ‘cause’ justifications for firing Steve Jacobs as Sands China CEO in July 2010 was that he had pursued direct premium business in Macau (i.e. VIP play without the middle man). Mr Adelson said this was against management instructions and at the cost of damaging relations with Macau junket operators.
“One of the reasons why we fired him [was because] we told him not to get involved with direct premium players the way he wanted to,” Mr Adelson said.
“He kicked off all the junket reps. Now, we have to build back the relationship,” he added.
Then in April, LVS issued a counter suit against Mr Jacobs’ wrongful dismissal suit. In the counter suit the company claimed Mr Jacobs had been too lenient with a junket, refusing to bar it from doing business in the company’s Macau properties even though an investigation by the Reuters news agency had linked it with a triad boss.
“Jacobs claimed (in June 2010) that the revenue associated with those junkets was substantial and that he owed the shareholders of Sands China a fiduciary duty, the performance of which would be placed in question if the agreements were terminated,” the counterclaim says.
Companies reserve the right to adapt business strategies to market conditions. It’s not commercially necessary or even desirable to hold one fixed view over time. But the above statements make junkets ask just how much LVS and Sands China value partnership with them. You can think of the junkets as the ‘pitot tubes’ of the Macau gaming industry. They don’t by themselves control the whole ‘aircraft’ but they give critical indications of the speed of travel. Arguably, Sands China ignores such market indicators at its commercial peril.
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