If you build it, they won´t not come By Andrew Tottenham, Managing Director, Tottenham & Co March 29, 2018 at 1:01 am Guillermo Fernández Vara, President of the Spanish region of Extremadura, has recently proposed legal changes which would allow for fast track planning consents and lower gambling taxes for the development and operation of large scale leisure complexes – those with a minimum investment of €1 billion. These complexes could feasibly include hotels, spas, conference centres, sports and cultural facilities and, of course, casinos, bingo halls and machine slot arcades. Other requirements would include a minimum job generation of 2,000 FTEs and hotels with a total of at least 3,000 beds, although you would be hard-pressed to build a 3,000 bed (1,500 keys) integrated resort for €1 billion. Should you manage to do all of this, you will enjoy a fixed rate gambling tax at 15 percent of Gross Gaming Revenue, instead of the marginal rate of 50 percent that currently exists in the region. Where have I heard this before? For those of you that do not know, Extremadura is in the west of Spain, north of Sevilla and nestled hard against the border with Portugal. It is where the famous Iberian black pigs roam free, eating acorns, before being made into delicious Pata Negra Jamon. It has national parks and beautiful scenery, but not much else. Approximately one million people live in the whole region, making it the most sparsely populated region in Spain, and per capita GDP is the lowest. There are no airports, and road and rail infrastructure are poor. So the big question then is why would anyone think of investing €1 billion in a tourist complex (or integrated resort) in such a place? It is my estimation that someone with some land and no knowledge of the economics of integrated resorts has been promoting this idea in the hope that they can sell a large amount of that land for an inflated price. It reminds me of the Grand Scala project that was floating around a few years ago, which involved somebody or other sponsoring the idea of multiple resorts on a site in the middle of nowhere in Aragon. In the end, the project died. Understandably, it’s never been revived. I should add here that there is no question that scale works in attracting customers from wide areas; think about the market for village fairgrounds and large theme parks. Large casinos, on their own, however, do not. There are plenty of casinos in Europe. Grand Scala had scale, lots of it, but one of the problems (and there were many) was that no operator wanted to be the first one to open; if you did, you would be opening something with insufficient scale to entice enough customers to travel to such a relatively remote area, and so wouldn’t get the visitation required for a sensible return. To say nothing of the fact that you would be operating in the middle of a building site. On the other hand, if every operator moved forward with their projects at once, they would have adequate scale, but they would be stuck sucking up losses until there was sufficient visitation to make a profit. Real integrated resorts, ones that are driven by gaming – I am not talking about resorts that have a casino as just another amenity – need scale to attract a high volume of visitors from large distances. These visitors will, naturally, need somewhere to stay, and that means a requirement for hotel rooms. But hotel rooms are expensive, and so are all of the other things in an integrated resort: restaurants, bars, night clubs, conference centres, spas, etc. (By the way, it is no accident that most conference and exhibition centres in Europe are owned by local governments.) Too few rooms and you will not get a return, which means less investment, which means the resort will need to be smaller, which leads to less visitation, which leads to even less investment, and so it goes until the project disappears. To get a sensible return on investment, you need gamblers who do not require rooms; in other words, locals. Local customers will spend money in the casino, restaurants, and bars, but will not utilise the other parts of the resort, so you won´t need additional capacity in those other facilities. Locals are what drives the ROI: their gambling activity subsidises the investment in the parts that don´t produce a good ROI. Why are international operators salivating at the chance to invest tens of billions of dollars in Japan? I´ll tell you why: the Tokyo-Yokohama area has approximately 37 million people. That is a lot of locals. Some of you might be wondering how Steve Wynn made The Mirage, the first large-scale integrated resort in Las Vegas, so successful when there were relatively few locals. I would respond that at the time, Las Vegas had over 20 million visitors per year who just had to visit the bright, shiny new Mirage. Therefore, a big local population was not necessary. Madrid and Barcelona are regions in Spain with relatively large populations, and probably the only ones that could make an investment in a big integrated resort work. Regions like Extremadura don´t. If someone is daft enough to make the investment and actually build it, I’ll bet they don´t come.