20 years of resorts (3): BUILD IT and THEY WILL COME

(part 3 of a four-part series): 1 2 3 4

The Venetian Macao Resort-Hotel was a whole new ball game for Macau. Built on reclaimed land in an area that had previously been earmarked for projects that couldn’t get enough backing, the integrated resort fulfilled several of the key objectives set by the government in the awarding of the concessions back in 2002.

Most noteworthy of these, perhaps, was the addition of largescale space for meetings, incentives, conventions and exhibitions (MICE).

As per the DICJ’s website, the government’s objectives for the industry could be summarized as: “Tourism, gaming, conventions and exhibitions as the ‘head’, and the service industry as the ‘body’, driving the overall development of other industries.” The Venetian Macao fulfilled all of these objectives, and more.

At the time of opening, in August, 2007, it was the world’s third largest building, with around one million square meters of floor space. Everything in it broke new ground for the industry: 3,000 large suites; a shopping mall of nearly 100,000 square meters; MICE space of 111,500 square meters; a 15,000-seat Cotai Arena; a 2,000-seat special purpose-built theater for Cirque du Soleil, and a casino of 34,000 square meters, three times bigger than anything in Las Vegas. This was in addition to more swimming pools, spas, and restaurants than Macau had opened in total up to that point.

To say that the investment required nerves of steel and great faith in the potential of the Chinese market would be stating the obvious. Sands’ founder, Sheldon Adelson, was on his way to becoming one of the world’s richest men, but he was not there yet, and the US$3.5 billion initial investment in the project was unheard-of at the time.

Skeptics had been numerous. Critics had doubted the market could support the sudden increase in capacity. They were all proved wrong. Crowds flocked in on opening day, bringing traffic in the area to a standstill. Visitors loved the exotic look and feel of the resort, designed on a template from Las Vegas, where the company had opened The Venetian Las Vegas in 1999. Gold-leafed ceilings, canals with singing gondoliers, acrobats and other “street mosphere” performers: it was like nothing experienced before by the average visitor from the mainland, most of whom did not have passports enabling them to visit Europe.

The new resort had proved the mantra of “build it and they will come” correct. Demand from the mainland visitor market continued to surge. The Venetian Macao’s success was followed a year later, in August 2008, by the addition of the first luxury component of the company’s plans for the rest of the Cotai Strip (a name trademarked by the Sands). When the Plaza Macao opened, with a five-star luxury hotel operated by the prestigious Four Seasons Hotel group, it, too, proved to be a commercial hit among a more discerning clientele.

Again, the Venetian Macao’s success emboldened the other concessionaires to speed up their own plans for Cotai. Although the coming years were soon to prove that what goes up can also come down, Melco looked ahead to opening the modernist City of Dreams, while Galaxy pushed on with its flagship Asian-themed resort, Galaxy Macau. And Sands unveiled plans for its “Lot 5&6” project, across the road from the Venetian, which later came to
be called Sands Cotai Central. The sky seemed to be the limit.

BUT THEN ….

The Global Financial Crisis had made its way to China by late 2008, and its effect began to be felt by the industry. Visitation had already begun to slow earlier in the year, but this had partly been artificially induced by the Guangdong provincial government, which had instituted restrictions on special outbound permits for the two SARs, known as the Individual Visitor Scheme. Gaming revenues had not yet been seriously hurt.

Around the third quarter of 2008, however, just as the Four Seasons had opened, it became apparent that China was not going to escape contagion from the GFC. International banking systems had begun to freeze and trade flows had begun to dry up. This caused a sudden shock to the middlemen who supported the growth of the VIP segment, known as the junkets. Coming at the same time as the IVS curbs, investors in listed gaming companies headed for the exits. Las Vegas Sands was among the worst-hit, with its stock falling from a high of more than US$140 to a low of less than US$2 within months.

Looking back, the shock of the GFC turned out to be shortlived. But at the time, the markets were uninterested in gaming revenues that had stabilized, after a brief contraction. Funding dried up for the new projects. Soon it became apparent that some would have to be delayed. Sands announced in December that it would need to mothball its massive Sands Cotai Central project, laying off thousands of construction workers. It would later resume and be completed in April 2012. Galaxy did not explicitly announce any retrenchment, but it slowed down development of its project.

Melco, which had already raised the necessary funding for its City of Dreams project, pushed bravely ahead.

SAVED BY THE BELL

They didn’t have to worry long. By the time City of Dreams had opened, in May 2009, revenue growth was resuming, albeit gradually. This was because the Chinese government had decided to backstop the country’s economy, which had been hammered by a drop of demand in its export markets, by launching a RMB 4 trillion stimulus package.

Within months, infrastructure projects on the mainland had stoked growth once again, and the runoff was flowing into Macau. By the end of the year, gross gaming revenues were in positive territory once more, and 2010 turned out to be the sharpest upward recovery recorded in the industry’s history (+57.8% YoY).

City of Dreams turned out also to be just what the market wanted. With a glass-and-steel façade, and brands such as Hard Rock, Crown and Hyatt, the property was aimed at a younger audience. It helped to diversify Macau’s offerings to visitors by contrasting with the Venetian, which was just across the road, giving Cotai’s main street the feel of a multiple-attraction destination – a “strip”.

At the same time, the IVS restrictions were removed, and the visitor market came storming back. The crisis was over, and stocks rebounded.

Galaxy, meanwhile, upped the work tempo on its massive project, situated on the western side of Cotai. When it opened its US$2 billion first phase in May 2011, the timing was perfect, as visitation and revenues were up strongly. Supply was again begetting demand, and Galaxy Macau added a new dimension to Cotai, further widening its base of appeal to visitors.

With hotel brands such as Banyan Tree and Okura, moreover, Galaxy Macau reached into other Asian source markets. Focused on Asian-themed attractions and its “World Class, Asian Heart” motto, Galaxy Macau was a resounding success from the first day. It later expanded with a second phase, which brought in the elite Marriott and Ritz Carlton brands, and opened a popular outdoor sun deck, including a wave pool, artificial beach, and a “lazy river” for tubing.

These were the go-go years of 2010-2012, when revenues were pouring in. China was recording double-digit GDP growth rates, fueled by high levels of credit pumping through the economy. Macau’s upside potential again seemed limitless, and concessionaires that had previously stood back from Cotai investments began announcing projects of their own: Wynn, MGM and SJM all began putting shovels in the ground on dazzling new plans that would come to fruition years later.

Meanwhile, non-gaming entertainment started to generate excitement, too, as Macau began attracting China’s middle-class shopping hordes, while major pop concerts and sports events were being staged. Money was being pumped into making Macau the world’s biggest entertainment destination.
The only thing was, nobody had reckoned yet with the reformist zeal of China’s new paramount leader, who took office atop the Communist Party in October 2012.

(Continued in Part 4)