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The Truth Behind Macau’s Luxury Market

With gambling revenues that dwarf those of Las Vegas and non-stop retail expansion, why are there so many mixed messages about China’s gambling mecca?
The Wynn Macau casino resort in Macau, China | Source: Shutterstock
By
  • Tiffany Ap

MACAU, China — On paper, the shopping opportunities in Macau should impress even the most worldly and sophisticated of travellers. For over a decade, fashion and luxury brands have been clamouring to cash in on this Chinese gambling mecca, with one store opening after another. Yet despite the vast amount of money that flows through it, Macau has always lacked a certain je ne sais quoi.

As the only place in China where betting is legal, moneyed mainlanders have flooded the city for the better part of a decade, producing double digit year-on-year growth and, with that, a sizeable market for luxury goods — but always as an afterthought.

According to popular stereotypes, shopping in Macau is a flashy way for people to spend their winnings or else something for wives to idle away their time with while their husbands hit the tables.

In private, the verdict reached by many luxury brand executives is that Macau’s business is indeed lucrative, but the overall retail experience leaves something to be desired. As Wilhelm Schmid, chief executive of luxury watchmakers A. Lange & Söhne, once noted: “Macau is good for business, not brand building.”

Contradictions and qualms

Last year, Macau attracted a record-breaking 31.5 million visitors, but it was a jarring turning point for this city of 600,000, which is situated just an hour's ferry ride from Hong Kong and not far from the wealthy industrial cities of Guangzhou and Shenzhen.

In an effort to avoid the scrutiny of China’s anti-corruption campaign, high-stakes gamblers from across the country started to give the city a wide berth. On average, shares of Macau’s casino operators fell 40 percent last year, causing the city to register its first decline in gambling revenue.

With a number of VIP gamblers conspicuously absent, Macau’s economic role was cast in a shadow of doubt. The Chinese government has said on numerous occasions it wants to make Macau a more diverse destination, which is family-friendly like Las Vegas. However, to date, the city’s development has been so focused on casinos — many are doubtful it could ever attract enough non-gamblers to transform itself into a bona fide shopping destination.

Those that are optimistic about Macau's retail potential, believe that the current climate represents an opportunity for fashion — along with dining and entertainment — to shine. Despite the decline, they note, the enclave's gaming revenue is still worth seven times that of the Las Vegas strip, taking in $44.2 billion compared to the $6.4 billion made by Sin City. If the Chinese state can now throw its weight behind a broader vision for the city, the opportunities for retail are sky high — or so the theory goes.

However, naysayers point to Macau's often desolate Fisherman's Wharf as proof of how visitors are interested in little else besides playing baccarat and rolling the dice for a game of sic bo. What's more, the theme park and al fresco shopping street launched by Macau billionaire David Chow in 2006 is currently undergoing a revamp — in an effort to bring it to life.

Extravagant transformations

Before it became a globally significant casino capital and a playground for the rich, Macau was a small, sleepy Portuguese colony with a less than salubrious reputation. When it was handed back to China in 1999, the humble town was home to just a few casinos which were owned by Stanley Ho. The casinos tended to be dark, smoky places catering to a particular type of clientele. Visitors who wanted to indulge in a bit of retail therapy went to New Yaohan, the only department store in the city.

Ho’s four-decade monopoly ended in 2002 when the government allowed foreign competition to enter the market, ushering in a cleaned-up and Disney-fied take on gambling. At 93, Ho remains a godfather-like figure in the city and his family holds enormous sway over Macau political and economic life. Half of the six licensed casinos are controlled by his family members.

His daughter Pansy runs MGM China, while his son Lawrence serves as co-chairman of Melco Crown Entertainment along with James Packer, the scion of an Australian family which made its billions in publishing and gambling. Ho’s de facto fourth wife, Angela Leong, helms another rival casino operator SJM Holdings, which was the Ho family's original cash cow. With the exception of One Central, an upscale shopping mall, it is in these casinos that the vast majority of retail spending is done.

In the last 18 months, the government has finally started putting pressure on the casinos to diversify. Regulators incentivised casino resort operators by issuing gaming table licenses based on what casinos could offer beyond gambling, such as luxury brand's flagship stores and gourmet dining from Michelin-starred chefs.

At the end of May 2015, this new vision of Macau was exemplified by the opening of Galaxy's Phase II complex. The first major resort to open in three years, it introduced 30 first-to-Macau brands like Delvaux, Moncler and Neil Barrett, in additon to novelty attractions such as the world's longest rooftop aquatic ride. One of the most notable changes however, was the fact that shoppers do not have to walk through the casino's gaming area to access the retail offer.

Scheduled to open this autumn, Melco Crown Entertainment’s new Hollywood-themed resort, Studio City, boasts the first figure-of-eight-shaped ferris wheel in the world and 300,000 square feet of retail. Five other large resorts, each with their own non-gaming attractions, are scheduled to open by 2017 — adding over 3.2 million square feet of retail space to the city.

Businessman Stephen Hung, often spotted at the haute couture shows alongside his wife Deborah, is currently constructing the ultra-luxury Louis XIII hotel, where boutiques will sell bespoke pieces on an invite-only basis. Graff Diamonds has already signed on to open a store. The jewellery stocked in-store will be priced at a minimum of $1 million, and go up to $100 million, according to Hung.

Meanwhile SJM has enlisted both Donatella Versace and Karl Lagerfeld to each design a hotel in its new resort: Lisboa Palace.

A new consumer covenant

“Gaming is not the hero of the properties anymore,” said Benjamin Vuchot, the president of duty free group DFS' North Asian division, which operates shopping arcades in the Four Seasons and City of Dreams complex. “It’s all about food, entertainment, retail and I’m a true believer that this will be the future of Macau."

“There is this misconception that retail is only a small part of the industry. If you look at the percentage compared to the gaming — yes, it’s true — retail is maybe less than 10 percent of gaming revenue, but this percent is around the same dollar size as the retail value in Las Vegas. Retail in Macau is less than 10 years [old]. It’s a recent phenomenon. I think what is very obvious is that all those big luxury brands will have at least one boutique in Macau as one of their top ten [selling] boutiques in the world," he continued.

Earlier this year, Salvatore Ferragamo's chief executive Michael Norsa said: "We had been predicting Brazil and India were the rising stars, but they do not represent more [business] than Macau [does] for most companies."

Sands Retail, the retail arm of Las Vegas Sands Corp, which manages several shopping complexes in the city, claims Macau's Four Season' Shoppes Mall is the world’s highest-grossing luxury mall — with per square foot sales of $5,810.

But the days of this kind of eye-watering store productivity may be numbered, as the luxury sector evolves in Greater China. Years ago, Terry Sio of the Rainbow Group helped pioneer Macau's retail scene as a distributor of international luxury brands such as Bally and Versace. The group has since turned its attention to frontier cities in the mainland.

However, there are still luxury labels making their first steps into the city, such as Alexander McQueen, which opened up its first store in the Galaxy resort last month. "If you look at the shopping centre that opened with Galaxy, it's fabulous," Bloomberg analyst Tim Craighead said. "I think it might be the best retail facility in Macau at this point and there's more of that to come."

Dealt a bad hand

Despite its momentum, Macau's prospects while it awaits the launch of its new resorts are worrisome to many. Its economy is heavily reliant on tourist numbers and, as a result, it is reliant on the fortunes of nearby Hong Kong (where Macau is usually added on as a day trip by visitors). As a result of the lingering effects of China’s anti-graft campaign — and Hong Kong’s flashpoints over pro-democracy reform — retail sales in Macau fell 11 percent year-on-year in the first quarter of this year.

A reminder of Macau’s unsavoury roots — and an example of why some VIPs have avoided the gambling mecca — resurfaced in January when Alan Ho, the nephew of the original casino tycoon Stanley Ho, and an executive at the New Yaohan department store, was arrested for running a prostitution ring. The fact that it was run by a member of Macau’s most prominent family was a clear sign that, underneath the sheen of the resorts, the city remains deeply linked with vice and isn’t quite the family-friendly destination the government is trying to promote it as.

More bad news came in April when an annual luxury watch and jewellery fair was abruptly called off just weeks before the event, another victim of the anti-graft campaign.

Growing pains or a structural decline?

Nevertheless, with the backing of the local and Beijing governments — plus the multi-billion dollar budgets of the casino operators — Macau’s long-term success as a shopping hub is likely to continue.

“The emergence of new development zones such as the Hengqin New Area should help stabilise Macau’s retail market,” said James Rogers of consultancy CR Retail, referring to a new special economic zone appointed by the Chinese government.

Although technically in mainland China, Hengqin is such a short commute to the city — it would essentially become a part of metropolitan Macau. In addition, a bridge scheduled for completion at the end of next year, further connecting Hong Kong and the nearby city of Zhuhai, will also boost connectivity to Macau.

“It should attract a population who are there to live and work and would mean that Macau is less dependent on tourism,” he said. Still, Rogers advises brands to be very cautious in approaching the market at this juncture.

According to Avery Booker, a partner at China Luxury Advisors, one key improvement will be increasing how long people stay in the city. The average visitor spends just over a day in Macau compared to over three nights in Las Vegas. The city could be more ardent in courting shoppers of other nationalities too.

“They need to do a better job of engaging not just mainland China. If they can bring in, say, more Japanese or Korean visitors, I think the Chinese will notice that this is becoming an aspirational destination to do more than just gamble,” Booker said. “They’ll hit their stride and figure out what to do differently. They have no choice. They have a vested interest in not seeing their city fail.”

But for analysts like Craighead, even with the benefit of time, Macau’s potential has its limits.

“It is a great place for somebody regionally from a broader Asian locale to visit,” he said. “Regional, yes. Global shopping destination? You know, I’m not sure.”

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