Is Europe Ready For Integrated Resort Casinos?
the number of IRCs currently in Europe
the average increase in tourism visits in Singapore post the launch of IRCs
EBITDA generated by the average IRC in 2015
What is an Integrated Resort Casino (IRC)?
The IRC acronym first surfaced in 2010 to describe Marina Bay Sands and Resorts World Sentosa in Singapore, but the basic theory behind an Integrated Resort Casino goes back at least to the early 90s, to glitzy landmark developments like the MGM Grand in Las Vegas.
There are three key features that mark out an IRC from other gaming developments:
- The ‘integration’ of one or more major casinos and gambling operations with hotels and other leisure and entertainment facilities, from sports, to shopping, to conference facilities, night-life, and even theme parks.
- The broad appeal of IRCs to gamers and non-gamers, locals and foreign tourists, and within this to high-spending VIPs.
- And last, but by no means least, the sheer scale. IRCs are huge operations in every sense: huge physical sites, huge numbers of gaming tables, huge upfront investment costs, and potentially huge tax revenue and job creation.
Established Major IRC Jurisdictions
Gaming has been the heart and soul of Las Vegas since 1931, when gaming was legalised. The first mega-resort was the Mirage, which opened in 1989, and since then we’ve seen a wave of ever bigger and more ostentatious developments. The Strip currently has 3.2m square feet of casino space, c.90,000 hotel rooms and employs 100,450 people across 47 different casino operations, of which 23 generate revenues in excess of $70m each and the city now bills itself as “The Entertainment Capital of the World”.
Singapore has come to the IRC party relatively late, but its two big resort casinos have made a huge impact since they opened in 2010. Marina Bay Sands and Resorts World Sentosa combined cost an estimated $10-15bn to build, and were planned and developed from the start as diversified entertainment and gaming destinations. By the end of 2011 the two casinos’ Gross Gaming Revenue (GGR) was equivalent to two thirds of the gross gaming revenues of the whole Las Vegas Strip, and they are amongst the most profitable IRCs globally.
Macau has a gambling tradition that goes back as far as three hundred years. Since the beginning of the 21st century, and the 2004 opening of the first mega-casino, the Venetian, the number of casinos has grown to 36 (as at the end of 2015), as the region has capitalised on its proximity to China and two-thirds of Macau’s 31 million visitors in 2015 were from the mainland.
The overall GGR in Macau is big money: growing from around
$6bn in 2005, to $44bn at the peak of the market in 2013, which at seven times Las Vegas’ $6bn gaming revenues, easily outstripped the Strip.
But since 2013 (the peak for Macau), the market has been suffering. The Chinese economy is slowing, and the government has cracked down on corruption and tightened visa regulations. As a result many fewer Chinese punters are coming to Macau.
The territory’s GGR for 2015 fell by 34% compared to 2014, and the decline has continued into the first quarter of 2016 (which is 13% below the first quarter of 2015). Macau is looking to counter this decline by diversifying into more mainstream gaming (targeting “mass-premium” players) and including more leisure into Macau’s casino proposition.
Despite the doom and gloom, we need to put things in perspective. Macau’s $28bn gaming revenue in 2015, is still five times the gaming revenue of Las Vegas. However things pan out Macau is going to remain a major casino jurisdiction for the foreseeable future.
The Appeal of the IRC Approach
What’s in it for the Customers?
The Mass Market
The worldwide tourism and hotel industry is seeing a trend towards high-class all- inclusive resorts, both with and without a casino element. Tourists enjoy the convenience of having all facilities in one place, and are prepared to travel considerable distances to reach IRCs, as the chart on the right demonstrates (see Figure 1):
Note: Based on respondents’ answer to the question: “when you visited this casino how far did you travel?” (n=3,035). The integrated resort casino is Foxwoods and the convenience casino is Twin Rivers. Based on a University of Massachusetts 2013 survey
In fact leisure, and not gambling, is the primary reason why people visit Vegas, the home of the first IRCs (see Figure 2).
Source: Las Vegas Visitors Authority, Visitor survey 2014
Like many other large casinos, IRCs rely on very wealthy VIPs, who can account for up to half of gaming revenues – around 54% in Macau, 50% in Singapore, and 25% in Las Vegas.
VIPs expect ultra-high levels of service and luxury both for themselves and for their entourage. Luxury suites, access to top restaurants, spas, shopping, entertainment, helicopter transfers, private chauffeurs and tour guides as well as permanent support staff speaking the VIP’s language are all part of the package and this richness of experience is harder to provide outside the IRC model.
Ultimately the attractiveness of an IRC to VIPs is a sign of likely success with the mass market as IRC facilities good enough for VIPs will mean that the mass market will follow.
What’s in it for the Casino Operators?
IRCs can be extremely profitable operations, with Marina Bay Sands in Singapore generating well in excess of $1bn in EBITDA and other resorts generating an average of c. $600m of EBITDA per property (see figure 3).
Source: Company Annual Reports
This applies across the business model: diversification of offer, diversification of revenue stream, diversification into new consumer groups, and – as new markets adopt the model – diversification geographically.
- Diversification of the Offer
The essence of the integrated model is the range of attractions on offer, which both broadens the venue’s appeal and gives the IRC an advantage over other adjacent casinos offering only gaming and nothing else.
- Diversification of the Customer Base
An IRC can cater much more comfortably to a wide range of customers, from VIPs travelling for the sole purpose of gambling at high-stakes private tables, to families looking for an exciting holiday destination with all the different attractions conveniently located together, and the more leisure focused millennials already mentioned. This breadth of attractions makes it much easier to generate higher spending per head, and also makes it easier to attract repeat gaming visits, as well as visitors who aren’t interested in gambling.
- Diversification of the Revenue Stream
The integrated model, by its very nature, broadens the operator’s revenue stream away from gaming alone. This can provide a hedge across the economic cycle, making the IRC more resilient in downturns. Las Vegas is a good example of this working in practice. The recovery of overall revenues in the Strip was driven by non-gaming that (1) bounced back faster and (2) continued growing faster than gaming (see Figure 4.)
Source: Nevada Gaming Control Board, 2015, Las Vegas Strip
What’s in it for the Governments?
New Revenue, new jobs
A successful IRC, can make a significant contribution to a country’s GDP. It can provide jobs, both in the construction phase and once opened, and provide gaming and other tax revenues.
The sheer scale of an IRC development can serve to attract other foreign direct investment, as overseas operators either develop sites themselves, or in partnership with local businesses. IRCs can provide investment in public infrastructure too: operating licences often require funding for airports, roads, sewage, electric substations, or land decontamination as part of the deal.
Support for Tourism
Singapore is the poster child here: the two IRCs which opened in 2010 have had a significant impact on the number of people coming to the country and their length of stay. For example the average annual number of international visitors has increased from c.8m pre IRC opening (average 1991-2009) to c.14m (average 2010-2015) and average length of stay has increased from an average of c.3 days to c.4 days per visitor. The facilities needed for an IRC can also double as an attractive conference venue, and the Meetings, Incentives, Conferences and Exhibitions - or MICE - market is an increasingly important and profitable segment of international and national tourism.
Opportunity for IRC Model in Europe
The IRC model could offer European countries significant opportunities in all of the areas identified above: revenue, jobs, investment, and growth. And yet, as the development maps demonstrates, Europe is absent from the list of major casino markets globally (see Figure 5.)
Note: Total casino GGR for the jurisdiction provided, examples of casino provide samples of casinos broadly in line with the IRC model. Only casino jurisdictions which include IRC with a total GGR over $1bn shown
How Europe Stacks up for IRC Consumers
Even though Europe is the third- largest region for gaming globally (see Figure 6), the casino market is tiny, and most casino properties are smaller, less attractive developments, catering to the locals market, where the revenue potential is inevitably constrained despite the fact that Europeans are clearly interested in gaming (see Figure 6).
Source: H2 Gambling Capital
There seems to be no reason why they would not be interested in a more attractive IRC proposition either local to them, or in nearby European countries to which they already extensively travel for either work or leisure.
There is also no question that an IRC in Europe would be an attractive travel destination both for Europeans and other travellers from farther afield. It has many tourist and leisure attractions, from heritage to theme parks to beach resorts. In 2015, five of the top ten countries by tourist arrivals were in Europe. Furthermore Europe is an established conference and meetings destination, with 15 of the world’s top 20 cities for this type of travel.
Apart from its many leisure and conference tourism attractions Europe is a relatively politically stable, stress-free place to travel, and benefits from excellent transport links. This is especially important to the crucial and demanding VIP customer, a customer that many European countries are geographically well-positioned to serve. Many sites in Europe would be only a few hours by air from a vast population of both mass-market visitors and High- Net Worth Individuals, in fact more HNWIs live nearer to Europe than Macau (see Figure 7).
Source: UBS, PwC analysis
And the number of these wealthy individuals is growing: the number of people with net assets over $30m is forecast to grow by almost 60,000 in the next decade, and Europe, which is already the largest region, will see further growth. What is more the Middle East and the former Soviet Union, key VIP regions for Europe, are expected to see the number of these wealthy residents rise by 40% and 32% in the next decade.
The continent is also seeing a surge in visitor numbers from China, including many wealthy Chinese visitors. The annual number of China outbound flight passengers to Europe has seen an 11% increase p.a. between 2009 and 2014, with first class passengers in particular growing at 25% p.a.
The operators can obviously see the potential demand in Europe, and the continent also offers a stable political and tax regime, a new and untapped market, and the possibility of becoming the first established and trusted IRC operator in Europe, a potentially significant first mover advantage.
And despite economic headwinds (e.g. Brexit, the asylum crisis, the slowdown in China) the overall outlook for Europe remains positive with modest real GDP growth of c.2% p.a. (2015 to 2021) and with the total number of HNWIs expected to increase by 25% to 2024.25
What is more, this could be a good time for operators to diversify into Europe, given the relative weakness of the Macau market. But there are other options for operators that Europe would need to compete with.
There is Strong Rationale for IRCs in Europe!
It’s clear that there is a significant opportunity to implement the IRC model in Europe, and do it successfully. The economic conditions are right, the fundamentals are strong, and the consumers are there.
Source: “Is Europe ready for Integrated Resort Casinos?” A PWC publication, www.pwc.co.uk