'Premium' players are new Macau bet
By Muhammad Cohen
MACAU - "Premium mass market" is the favorite current catchphrase in the local casino business. Management loves highlighting how much they love "premium" customers and the delights their resort holds for them. But casino executives won't say who these key customers are, what they actually do, and how much money they spend doing it.
Trying to analyze the premium mass segment from the outside, particularly in the context of Macau's development of six new multibillion dollar resort projects, plunges one deeper into a version of Alice's Wonderland, where words mean whatever someone else wants them to mean.
The term premium mass market came to prominence late last
year. At the time, growth from Macau's bread and butter high rollers, known as VIPs, began to level off. They account for more than two-thirds of the city's gross gaming revenue (GGR), which reached US$38 billion last year, more than five times the take in Las Vegas and just ahead of the entire US commercial casino industry (excluding Native American gaming). Last year, VIP revenue dipped to 68% of total GGR, its lowest percentage since 2009.
The slump in VIP revenue, approximately 90% of it from mainland Chinese players, coincided with the Chinese government's change in leadership and a slowdown in the country's economy. "Premium" customers gave companies a story to tell investors and analysts, though the lack of specificity and coincidence of the timing raises suspicions that the narrative has an element of tall tales. What's indisputable in the Macau numbers is that mass market growth has for far outpaced VIP growth more than two years, and still it does, even with a recent VIP rebound.
Junket a go-go
The distinction between VIP and mass market play isn't just a bookkeeping matter. VIPs get a host of benefits that mass market players don't. VIP players usually come to casinos through a junket promoter. Most promoters have private rooms for their players at multiple casinos, built and staffed by the host resort. Promoters find the players, though a series of sub-agents, and provide players with a variety of services that include transportation, accommodation, meals and entertainment, plus a small cash rebate, measured in tenths of a percentage point, on their play.
Most important, junket promoters provide credit, which allows players from the mainland and elsewhere to skirt currency export restrictions. The junket promoter collects the debt in the player's home country by whatever means necessary. That's especially important in mainland China, where gambling debts cannot be collected through courts, and in many other Asian countries where, even if debts can be collected in theory, wealthy players regularly benefit from the home court advantage in any type of legal action.
Macau casinos themselves provide credit to a limited number of so-called direct VIPs, mostly from Hong Kong and Singapore, where collections through the legal system can succeed.
In return for promoters' services, casinos split profits on VIP play with them, either through rebates up to 1.25% of their players' betting, known as the roll or rolling chip total, or through a straight profit-sharing arrangement. Junket promoters provide rolling chips, also called dead chips, for the player to bet - the chips can't be cashed in but must be wagered - committing the player to a certain level of spending.
Industry sources peg average monthly total wagering, or rolling, from junket players at around HK$600 billion (US$78 billion) and the number of VIP players at 200,000 to 300,000. Due to visa restrictions, mainland VIPs can generally only visit once every three months. That puts average VIP rolling per visit north of HK$6 million, with many rolling millions of US dollars on every trip.
Mass-market players don't get credit and don't get the same level of red carpet treatment VIPs demand. But they are far more profitable than VIPs, since casinos don't have to share their take with a promoter. That explains why casino profit growth didn't sag even when VIP play did. Mass market customers, the overwhelming bulk of Macau's 28 million annual visitors, are also vital to help diversify the perception of Macau from being a gaming destination into the more well-rounded vacation and entertainment spot that government officials in Beijing as well as Macau say they want.
But mass-market players don't make a very compelling story for investors and analysts. Most don't even spend the night in Macau, visiting in tour groups, and maybe dropping a few hundred bucks in the casino between seeing sights and buying Macau's signature snacks to take home as souvenirs. But among these small potatoes, there's a select group of premium mass-market players.
"Premium mass market generates about 50% of mass-market gaming revenue," says Mary Mendoza, managing director of Macau-based marketing consultancy The Platinum Ltd. Premium customers don't just represent high-profit players; they are prime targets for the thousands of five-star rooms, plus gourmet restaurants, big-ticket entertainment and luxury shopping that casino resorts lay on in the name of diversification, and the even more of everything that the government has approved to open by 2017.
Premium mass-market players may have net worth comparable to VIPs, but two main distinctions separate them from VIPs. Like other mass-market punters, they don't play on credit - for them, it is strictly cash. That means they don't use rolling chips, so they don't commit to a minimum level of play on each visit.
"Premium players come from a number of sources," Gaming Market Advisors principal Andrew Klebanow says. "Some are mass players who now concentrate their play at one casino to avail themselves of the casino's premium tier benefits. Others are former junket players who find the benefits of being loyal to a casino greater than being loyal to a junket operator. Others are mass players who are enjoying good fortune and advancing up to higher levels of play."
"Premium mass players always existed, but now it has become a trendy technical term," Mendoza says, noting that until recently Macau's casinos operators didn't properly recognize them. The next step, the former Sands China marketing executive says, is for casino operators to formulate strategies that specifically target the premium segment. Operators won't reveal their strategies, though, claiming that that is confidential marketing information.
One premium customer strategy that's known is offering complimentary services. These "comps" include rooms, meals, show tickets, and even retail coupons. Getting them for free means premium mass customers aren't providing income to support diversification of Macau's economy. In fact, though casino operators brag about their array of attractions for premium customers, recognition as a premium customer comes only through gambling. So rather than reshaping the market, catering to the premium segment makes Macau even more gaming centric.
How much a premium customer needs to gamble is another tricky question. Some casino executives say premium players gaming losses can amount to no more than HK$25,000 - just over US$3,000 - per visit. Since Macau's predominant table minimums have risen to HK$300 per bet, and HK$1,000 and HK$3,000 tables are common, a short run of bad luck can give nearly any player a loss of premium proportions. Other insiders peg the annual loss for a premium player upwards of HK$300,000.
That said, casinos really care about the amount players bet, rather than how much they win or lose in a particular session, because there's a house advantage built into the game that guarantees the casino wins in the long run. Casinos quantify that long run win using a calculation called ADT - average daily theoretical (loss for player/win for the casino) - based on how much a player bets.
Whatever the level of play casinos are looking for, how they identify and track these players is the key question. Some executives insist that premium players are found and rewarded through their use of casino loyalty cards. Having their play on record is necessary, they say, for the casino's data crunchers to make effective marketing strategies and for bean counters to make spreadsheets sing for top management and investors.
But many Macau players at all levels, especially mainlanders, want to maintain their anonymity and so they avoid loyalty card play. During China's leadership transition, when there was much talk of a crackdown on corruption, and some VIPs chose to lay low, either stopping to play or moving to the mass market floor.
"Why would a VIP give up a 0.7% rebate for a free room?" a top analyst who requested not to be named asked. The only sensible answer, especially considering that a VIP play would get the room and more along with the rebate, is that they want to stay below the radar.
Moreover, if carded play is the key to premium player marketing, then casino operators have no strategic secrets to hide. Loyalty-card rules and tiers requirements are publicly available, and every casino knows its rivals' programs at least as well as its own. The card rules in the application brochure that attractive young employees hawk on casino floors spell it all out.
Other knowledgeable sources contend that premium players aren't a product of carded play. Instead, they say, casino floor personnel find and reward premium players. The problem with that theory is that casino floor personnel have so many other duties, change frequently over the course of a players' session - and players switch tables, too - and have very uneven skill levels. In that scenario, the identification process becomes more art than science, with the uneven results that are common in art.
Finally, several resorts under development have declared that they are targeting and catering to premium players. Yet one of the few things insiders agree on is that the premium market comprises just 5% of the overall mass market. So when a 1,500-room property says its main focus is premium customers, it's the Macau version of Garrison Keillor's Lake Woebegone, where all children are above average.
Lake Woebegone, of course, is a fictional place. Savvy investors are well advised to keep that in mind as Macau casino operators regale them with tales of the premium mass market.
Macau Business special correspondent Muhammad Cohen told America's story to the world as a US diplomat and is author of Hong Kong On Air, a novel set during the 1997 handover about television news, love, betrayal, financial crisis, and cheap lingerie. Find his blog, online archive and more at www.MuhammadCohen.com, and follow him on Facebook and Twitter @MuhammadCohen..
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