Macao gambles on diversification after crackdown on high rollers

Originally published on Nikkei Asia (January 27, 2023)

MACAO -- Chinese tourists are once again streaming into the gambling enclave of Macao, breathing life back into the centuries-old neighborhoods that lay quiet during three years of COVID restrictions. Taxis are now nearly impossible to flag and restaurant reservations are a must.

Inside the glitzy casinos such as the Venetian and Casino Lisboa, players crowd around the dozens of baccarat tables that sat empty throughout the pandemic.

But the buzz on the main gaming floors is nowhere to be found on the casinos' more exclusive levels.

On the second floor of the MGM Macau, once frequented by Chinese high rollers, the nameplates on many VIP rooms have been taken down and their doors locked, while several had metal shutters rolled down. In one of the two elite casino lounges that were operating in mid-January, three Chinese gamblers sat on a chinoiserie bench in the corner looking at their phones, apparently uninterested in the tables.

"These rooms used to be full and filled with excitement and lots of gambling. Now they're just here to hang out," said an agent for gambling junkets.

Macao is the only Chinese territory where casino gambling is legal. Before the pandemic the industry was a cash cow, with gaming revenue accounting for more than 80% of government income. But three years of strict zero-COVID restrictions battered the industry. Revenues plummeted to their worst levels on record last year, handing the gambling crown back to Las Vegas.

Those COVID restrictions came on top of a crackdown that has left casinos without their most lucrative customers: high rollers.

Authorities last year revised the city's gaming law and introduced stricter regulations on junket operators, the middlemen who bring high rollers to casinos. High-spending VIP gamblers contributed to nearly 50% of total gaming revenues in the pre-COVID days, but industry insiders say the crackdown has annihilated the high-roller business. Junkets can now only work with one concessionaire and, instead of receiving a share of the gaming revenue, receive a flat commission rate.

"We will never go back to pre-pandemic times," said a junket operator. "We can't make the same kind of money as before. Times have changed."

The crackdown -- fueled largely by Chinese President Xi Jinping's desire to tackle corruption -- has compelled operators to focus on the mass-market segment, which observers say could help bring in tourists.

"Leisure -- legal and healthy -- gaming can still be a part of the overall tourism package that we could keep, as it strengthens our place offerings and makes us unique compared to other cities," said University of Macao business professor Desmond Lam.

But overall this segment is not as profitable as VIP gaming.

"The shrinking of junket VIP rooms and the weak economy in Mainland China will affect the demand for high-stakes betting," wrote Zhongtai Securities in a report on Jan. 3, just days before the country dropped travel restrictions. "In the future, the customers in the gaming industry will shift from ultra-high-end to mid-to-low-end, and the average gaming revenue per gaming table will decline."

Casino operators face another challenge with the onset of new 10-year licenses that have been designed to steer them away from the golden goose of gambling.

Under the terms of these licenses, the six gaming companies are required to develop foreign tourist markets and invest in non-gaming projects, while at the same time preventing "illegal activities" and upholding "social responsibilities."

MGM China, Galaxy Entertainment, SJM Holdings, Melco, Sands China and Wynn have promised to invest a total of 118.8 billion patacas ($14.7 billion), with 91% earmarked for non-gaming projects and toward attracting foreign tourists. Only 10.1 billion patacas will be invested in gaming.

Melco has promised to construct six new theaters and bring in "superstar acts" to perform at its Studio City arena within the next two years. The late Stanley Ho's SJM Holdings has pledged to build three new museums, including an art and culture museum and a gaming history museum, and redevelop the waterfront along the west side of the peninsula into a food and retail destination. Galaxy Entertainment said it will build a technology theme park occupying 61,000 square meters and a 7,000-sq.-meter art museum, and also promote international sports and cultural events.

But questions remain over whether these projects will bring the desired change. The city government has been talking about diversifying the economy for years and has said it wants to have 60% of gross domestic product come from non-gaming activities.

"Gaming has always been the main source of our economy, and it once made up more than 60%, about 60% to 79%, of the city's GDP. This figure is adjustable," Macao's leader Ho Iat-seng said in November after delivering a policy address.

With investment being funneled into non-gaming activities, "There's still a raging debate about what [diversifying away from gaming] really means," says independent gaming analyst Vitaly Umansky.

Umansky argues that it is not just an investment into events and infrastructure, but that the government needs to lead and put its money where its mouth is.

"You just don't have the capacity in Macao in terms of hotel rooms -- in terms of staff, in terms of skill set -- to actually run large-scale, non-gaming profitable businesses that are meaningful," Umansky said.

Gaming operators and their more than $50 billion worth of investment in the city over the past two decades have provided Macao's population of 600,000 with an abundance of employment since the market was liberalized and regulated in 2002. Many young people take well-paying jobs in casinos. The sector, which transformed the sleepy former Portuguese colony into a glitzy gambling mecca, accounts for 22% of the city's employment.

Unemployment hit record levels during the pandemic, while the six companies bled money to keep operations alive. Thirty casinos now remain, down from 42 in the first quarter of 2022.

Chloe Chao, head of the New Macau Gaming Staff Rights Association, told Nikkei Asia that despite the recent spike in visitors, casinos are still not hiring and are actually cutting staff.

"We are worried that the investment into non-gaming activities means less jobs for us. We don't have a local population with non-gaming skills or talent," Chao said.

Analysts have echoed those concerns. The International Monetary Fund warned in a report last April that there was an insufficient supply of skills needed for the city to diversify. Only 14% of those employed in Macao were considered "highly skilled," it said, and addressing the skills gap would be costly and take years.

"The government is very parochial in terms of thinking about labor, in terms of thinking about skill sets, in terms of thinking about foreigners coming in for work," Umansky said.

Connectivity to international markets will also be a key challenge as the government encourages gaming operators to bring in non-Chinese tourists. There are few direct flights from outside China. "It's just not easy to get to Macao," said Kevin Clayton, resort consultant and former chief marketing officer for Galaxy Entertainment. "That has to be a thing that the Macao government and the Chinese government have to fix fairly quickly if [the city] wants to expand its business."

Macao also faces growing competition from elsewhere in Asia. Thailand recently said it will consider legalizing casinos with regulation expected within two or three years, while countries like Singapore and Cambodia have already regulated casinos and offer many other tourism options.

Another junket operator, who spoke with Nikkei Asia on the condition of anonymity, said with the crackdown on high rollers in Macao, junkets are shifting their strategy to shuttle Chinese gamblers to overseas markets -- especially as Beijing can restrict visas to Macao.

Macao's progress in diversifying its economy has not been "perfect and slow," according to business professor Lam. Doing so, however, is not only possible but necessary, he says.

"Over-reliance on a single sector is certainly not a good idea, even for Macao. ... To completely shake off a gaming-only image will take time."