The Galaxy Hotel in Macau. Global gambling center Macau has long been a stronghold for the world's top high rollers, but this may be set to change in the coming years. With a major percentage of business coming from the mainland, many of Macau's top casino and hotel operators took a significant hit from China's economic slowdown and corruption crackdown, but recent evidence has shown that it's on the rebound. Its August revenue increase marked the second highest of the year, leading many to point out that the return of high revenues is a signal that China’s corruption crackdown may be letting up. However, there may be another reason: its growing reliance on the middle class as opposed to just its top-spending VIPs. Macau saw both a slump in VIP arrivals during the Lunar New Year holiday as well as lower spending in 2012, but the area's major casino and hotel companies are witnessing their revenue bounce back, and numerous expansion projects are underway. SJM Holdings, Macau’s largest casino operator with a 25.8 percent share of its entire gambling industry, beat analysts’ net profit growth forecasts for the first half of the year with a 12.2 percent rise. The company also recently announced a partnership with design house Versace to build a 2,000-room casino-resort project in the territory’s booming Cotai area. Meanwhile, another major casino operator, Galaxy Macau, also reported quarterly earnings well above estimates and will be undergoing a second-phase expansion of both gaming tables and hotel rooms. Although VIPs are making their way back to the gambling tables and phrases like "Versace hotel" tend to conjure up images of extreme opulence, the downturn era has prompted some Macau businesses to diversify into more mid-range offerings. High-spending VIPs, known to drop six figures a night gambling, have traditionally counted for two-thirds of Macau’s total revenue. However, the government's crackdown has shown casino magnates just how unstable it can be to rely only on high-rolling whales, and some are looking to China's growing middle class to keep revenue flows more stable. The rise of entertainment options and “leisure gaming” are a main result of companies’ goals to appeal to more mid-market visitors. According to Bloomberg, casino tycoon Stanley Ho’s daughter, Pansy Ho, is especially keen on cashing in on mass demand: Members of Ho’s family who have branched off to set up rival businesses have also courted middle-class gamblers. Melco Crown Entertainment Ltd. (MPEL), where Ho’s son Lawrence is CEO, lures visitors with the House of Dancing Water, a show featuring motorcycle stunts. MGM China Holdings Ltd. (2282), where daughter Pansy Ho is co-chairman, had a pavilion showcasing more than 1,000 butterflies last year and now features an aquarium exhibiting more than 1,000 fish. “Chinese consumers are becoming very demanding,” MGM China CEO Grant Bowie said in an interview. “When you start moving into leisure gaming, which is what the mass market is all about, you need to develop multiple touch points.” In addition, members of the Macau junket business, whose entire livelihoods have been based on flying VIPs out to Macau to spend big, have also been branching out into other business: Despite robust mass market demand, a crackdown on corruption and pervasive graft has seen the supply of millionaire VIP players to Macau over the past year, prompting junkets to seek to diversify their income streams. Suncity, which makes around HK$135 billion ($17 billion) in monthly gaming turnover, according to Choong, has expanded into mining with iron ore operations in Indonesia. It has also branched out into financial services in Hong Kong with 24-hour securities, forex and commodities trading, real estate in China, food and beverage, film and media. The company has two listed arms, Sun International Resources Limited and Sun Century Group Limited. Golden Resorts Group, headed by Hong Kong billionaire Pollyanna Chu, has been invested in financial services through listed arm Kingston Financial Group since 2011. These efforts are not to say that VIPs are going anywhere soon, as evidenced not only by Versace's new undertaking, but also by the construction of projects such as the extravagant Louis XIII Hotel slated for 2014 and additions of VIP gambling tables by both SJM and Galaxy. However, as the luxury crackdown shows no signs of abating in the near future and middle-class Chinese consumers begin to take up more of an overall share of the consumer market, we are likely to see more instances of mass-appeal efforts across the board. This trend has also been exhibited in the strategies of high-end restaurants hit by the luxury crackdown. Even if these strategies coincide with a traditional focus on luxury, they are likely to become more prominent in the future as the middle class expands.
