Macau, already reeling, faces possible total smoking ban
After implementing a partial casino smoking ban in October, Macau is contemplating a total prohibition on smoking in all areas of the region’s gaming market.
Talk about throwing gasoline on a raging inferno.
Macau’s casino industry is challenged, and that’s an understatement.
The market has had eight consecutive monthly gaming revenue declines. A 2.6 percent dip in 2014 was the first annual gaming revenue drop since American-owned casinos began operating in Macau in 2003. Analysts see record-setting futility in February.
So why not add to the misery?
Most agree the move last year to outlaw smoking on Macau’s main casino floors contributed to the gaming revenue declines. Smoking was allowed in private, VIP rooms, and casinos were allowed to build smoking lounges similar to airport-style smoking rooms.
Nevertheless, analysts thought the smoking ban disrupted customer playing patterns.
Deutsche Bank gaming analyst Andrew Zarnett estimated the ban resulted in a single-digit-percentage decline in Macau gaming revenue, but was also “worse than originally expected.”
He told investors the exact effect is “difficult to pinpoint” because of other issues in Macau.
A crackdown on corruption by the Chinese government — focused on junket operators who bring high-end baccarat gamblers to ultraexclusive private gambling rooms — is the biggest cause of the market’s declines.
The past four months of 2014 saw double-digit-percentage decreases, including a 23.2 percent dip in October and a record 30.4 percent decline in December.
The smoking ban’s effect in the declines varies depending on which analyst you speak with. Fantini Gaming Research said the ban could have caused a 10 percent to 15 percent drop.
Macau-based Union Gaming Group managing director Grant Govertsen said his “best guess” is the current ban had a 3 percent effect on mass-market table game revenue, even with “the benefit of having smoking lounges on the mass market floors.”
Those smoking lounges could disappear.
Last month, Macau’s secretary for social and cultural affairs said the legislative council will soon get a proposal to ban all smoking in casinos, including the private high-end gambling rooms. Government officials say the proposal comes without consideration of any related economic effect.
Macau’s Health Bureau released a three-year review that looked at smoking bans in all of the special administrative region’s public areas. The report found that 60 percent of casino employees dislike working in VIP rooms where smoking is allowed while 70 percent of Macau citizens and 80 percent of casino employees support a full casino smoking ban.
“As such, the government is now recommending a total smoking ban, (which) would include the cessation of smoking in VIP rooms, as we had expected,” Govertsen said. “It would also require the removal of the already-operational smoking lounges on the mass market floors.”
The legislation would add penalties for violating the ban and would implement a 70 percent tax increase on sales of tobacco products.
Analysts are unclear when the smoking ban would take place. The bill is expected to be introduced this spring and the Macau Legislature will meet through August.
Zarnett placed 2016 as the target date.
“If realized, we anticipate that this will have an incremental negative effect on gaming revenue,” Zarnett said.
Macau casino operators acquiesced to limits, but a total smoking ban might cause some heartburn. However, Govertsen said casino operators and investors were expecting the news.
“The fact that the government wishes to ban smoking in VIP rooms is well within our expectations,” Govertsen said. “However, we hope that cooler heads would prevail once the bill comes up for debate and that the smoking lounges are allowed to remain.”
Casino operators worry what might happen when players leave the gaming tables for a smoking break. Some might return to gambling, but others might just move on.
“A break in play often means a player has time to reconsider their play situation,” Zarnett said.
Govertsen has already accounted for the smoking ban in his Macau revenue forecasts. This year, Union Gaming expects high-end gaming revenue to decline by 9 percent. But the market could bounce back by up to 10 percent in 2016, because of an economic recovery and the opening of new casinos.
At the end of day, Zarnett said Macau casino customers must accept the smoking ban. After all, Macau is the only legal casino market in China and other Asian gaming jurisdictions are not easily reachable.
He said customer reaction would be similar to smoking bans in U.S. casino markets. Players have learned to deal with the changes.
Howard Stutz’s Inside Gaming column appears Wednesdays and Sundays. He can be reached at hstutz@reviewjournal.com or 702-477-3871. Find on Twitter: @howardstutz.
