Macau Casinos Looking to Rely Less on the Junket Operators to Lure VIPs to Their Properties

Macau casinos are trying to break away from their long-term partners, junket companies, in order to maximize profits.

It seems that all big Macau casinos are still going after the VIP buck, but they now try to pursue the high-rollers outside the junket systems. Let’s take a look at the history and understand the latest trend.

The early Macau gambling years

Back in the rough ‘90s Macau was the center-stage for frequent triad gunfights for control over private rooms where the wealthy Chinese gambled. When Macanese gambling laws allowed foreign investment into the gaming industry back in 2002, the situation has started to become normal.

Right from the start major casinos in the jurisdiction have struck symbiotic relationships with junket companies. Sheldon Adelson and his Sands China were among the first one to come to the market. Surely they needed to attract high-roller players and junket companies were the way to go.

They’ve turned to Suncity Group and Jimei Group, which boasted years of experience in luring rich Chinese businessmen to casinos. The lucrative partnership allowed Macau to grow at record speeds and overtake Las Vegas as the capital of gambling. By 2013 Macau casino revenues have reached $45 billion – seven times that of the Nevada casinos.

What’s the current situation with junkets

It all sounds like a fairy-tale, but in reality the huge success came at a great cost for casinos. Only last year Macau casinos have paid over $13 billion in commissions to junket operators. Naturally, no one wants to share and these high costs are the main reason casinos want to break away from junket services when it comes to high-rollers.

Now Macau casinos are going against their long-term partners. For years, junket operators were responsible for inviting rich Chinese gamblers to Macau, ensured they got the best possible accommodations and made it possible for them to receive interest-free loans in order to avoid the cash limit problem they have on mainland China.

Sands China is now building its very own fleet of private jets and limousines, available to high-rollers 24/7. The hotel operator gives the Chinese VIPs the best of the best including up to 8,000 square feet suits with non-stop concierge services, in other words everything to make they stay and play.

Some Macau casinos are even going as far as creating ultra-high-stakes rooms on their properties – something that has been always done by junkets, who leased casino spaces. Everything is falling into place if we look at the numbers. Casinos will be able to make up to 15 percent more from VIPs in case they host and entertain high-rollers themselves. However, some industry analysts are saying this figure can even go up to 50 percent.

What do VIPs mean for Macau

According to recent reports in Macanese gambling news, high-rollers, or VIPs, account for roughly two thirds of casino revenues in Macau. Most of them are Chinese rich, who use credit to gamble, as China is very strict about its control of the currency. They bet around $1 million per visit on average.

Macau casinos are moving away from junket operators

• Long-term partnerships are now regarded as a burden

• Macau casinos can’t collect debts under Macanese gambling laws

• And this is one of the most important arguments in favor of junket operators

When the first five foreign operators came to Macau – Wynn Macau, Melco Crown Entertainment, Galaxy Entertainment, MGM China, and Sands China, the junket partnership was the only way to go in order to get the VIPs.

All the new companies weren’t allowed to advertise in China, had no legal way to collect debts, and had to turn to promoters and agents for luring the high-rollers and making sure they pay. But during the decade of operation casinos got to know most of the VIPs on first-name basis, and now don’t need a middle-man to make them happy.

Here’s what CLSA analyst, Richard Huang, had to comment: “Casinos have a much more in-depth database to tap. With most of the rich Chinese having offshore bank accounts or properties, that gives casinos increased comfort in extending them credit.”

What do junkets take

Junkets operate on commission for each VIP they deliver to a casino. Usually it’s 1.25 percent on the player’s rolling chip turnover, or on the aggregate amount of all bets made. Commissions can reach up to a total of 44 percent of what casinos are making from high-rollers. And then there’s the 39 percent in government taxes, after which the casinos’ profits decrease even more. Nonetheless, Macau casinos are doing fine with only Sand China posting a year-on-year increase in net income of $2.2 billion.

In the case of MGM China, the operator is looking to work closely with its own customers in order to better manage the risks. Grant R. Bowie, CEO of MGM China, said: “The junket model is a very successful model in terms of efficiency, but we need to diversify. No organization should limit themselves to one geographic market or one business strength. It’s too high-risk.”

A different point of view

However, not every Macau casino operator wants to say good-bye to junkets. Asia’s largest casino group in terms of revenue – SJM – is entirely dependent on junket operators to bring in the VIPs. Their CEO, Ambrose So, commented: “SJM is comfortable with our junket relationships and with the junket system, which operates legally in Macau.”

With a view to minimize their dependence on junkets help, Macau casinos have been introducing live entertainment and big shopping malls in order to attract middle-class families and gamblers. Macau is now filled with boutiques from various designers and luxury companies including Christian Dior, Prada, Burberry, Rolex, and so on.

Casinos are also after soft-core gamers. Perks like concerts, theaters, spas, exquisite dining are all catering to tourists will less affection for gambling. These practices are already bringing in results: 2011 was the peak of high-rollers in Macau with 73 percent of revenue, while last year it was already 66 percent. Lawrence Ho, co-chairman of Melco Crown and Stanley Ho’s son, said: “The influence of junkets is decreasing as the mass and the premium mass segments become more substantial.”

How are junkets responding

Junket operators are not sitting silently in response. Suncity for one has already ventured into creating VIP clubs in South Korea and the Philippines. Other diversification attempts for them included music, movie production, and even expat and immigration consulting. And of course, the operator is continuing to serve Macau casinos belonging to Sands China and Galaxy Entertainment.

Industry experts agree that junkets will not cease to exist all-together. Their extensive contacts and knowledge of rich Chinese gamers is one thing, and their willingness to serve as a buffer for credit risks is another important argument in their favor. There are now around 200 licensed junket companies in Macau.