Integrated Resorts in Europe: Part Two By Andrew Tottenham, Managing Director, Tottenham & Co December 2, 2020 at 6:43 pm In my last article, I discussed the economics of integrated resorts (IRs): what they are, why they work and the economic model. In this article, I examine whether Integrated Resorts will be successful in Europe. First a recap of my last article. Integrated resorts are dependent on the gaming element to get a return on investment; the casino cannot be an amenity for the guest, it must be the most important activity in the resort. Scale and scope (size and a broad range of activities) are important in creating a must-see destination, so that the IR attracts people from large distances. The close proximity of all of the activities drives additional revenue. However, all of the non-gaming amenities and activities have a much lower return on investment, but they are needed to draw people from a large radius. Local residents do not require these additional amenities and therefore are the most important market segment. IRs without a large local population or a sizable amount of quality hotel rooms in the vicinity cannot hope to make a good return on the project overall. Today, there are no true IRs in Europe and that begs the question, why not? Is it because Europeans do not like them? Or is there some other reason? In my opinion, despite having a much lower propensity to gamble than most Asian nationalities, Europeans would and do enjoy IRs; more than a million Europeans visited Las Vegas in 2019. They do not appear on the VIP or VVIP lists of the large Vegas operators, but they do travel, sometimes taking more than 20 hours to get there. So why are there no IRs in Europe? Firstly, it must be remembered that there is an incumbent casino industry in every country in Europe. There are over 140 casinos in the UK, more than 240 in France, etc. These operators do not take too kindly to foreign interlopers and will and do lobby against the changes in the laws and regulations that would enable integrated resorts. Secondly, if an IR does not have the monopoly on casino gambling in a region, it can make a sensible return only with a low tax rate; governments are reluctant to reduce the levels of tax on gambling. And lastly, usually there is little political will to make the legislative and regulatory changes necessary and even if there were, the political cycle (the times between elections) is too short to get the changes done. However, sometimes the stars align and the necessary changes are made, as we have seen in Cyprus, Athens and Cataluña (although the latter is bogged down in the nightmare that is the convoluted zoning system in Spain). Will they be successful? That depends on the definition of success. Yes, they will attract customers and yes, they will be profitable. But will they provide a good return? That depends mainly on one thing – location. The IR needs to be in an area with plenty of other, quality hotel rooms and/or a large local population. I’m generalising when I write that Northern Europeans head south for their vacations and Southern Europeans stay south, but it is mainly true. Therefore, it makes sense to put a casino somewhere warm, near the Mediterranean. However, much of the Mediterranean is dominated by 3-star hotels and resorts catering to the “bucket and spade crowd” – Mum, Dad and two young children. The adults in this group are not profitable casino customers, as Las Vegas discovered throughout the 1990s. There has also been a rise in “all-inclusive” holidays in Europe. Tourists book a resort, and everything (room, food, drink, transportation, etc.) is included in the price. Guests spend their days sunning themselves by the pools, eating and drinking copious amounts and never leave the resort. They pay one bill either before arrival or when they leave. Again, the guests at these resorts will not be rich pickings for the IR. A good example of the impact of all-inclusive tourists is Sharm el Sheikh in Egypt, a resort town on the Red Sea. The customer base is mainly European, including a large number of Russians, and the resorts offered all-inclusive holidays. Before the terrorist incidents in Egypt a few years ago, about 5 million guests visited Sharm every year, mainly Europeans. There are casinos in Sharm, and they are not particularly wonderful, but in the best year, the total GGR was a little less than $15 million, or an average of $3 for every visitor to Sharm. Only between 3% to 5% of adult Europeans gamble in casinos, with spends much less than in the U.S. and significantly less than you will find in Asia. The average spend per visit of a casino customer in the UK (outside of London) is less than €40 and this is from existing casino gamblers. It is true that the velocity of spending increases when people go on holiday, hence the reason that airports have become retail opportunities, and IR operators can expect a higher gambling spend. Also, that is why Las Vegas has some of the highest-grossing retail sales per square metre of anywhere in the USA. The number of high-end luggage stores in Las Vegas always surprises me, especially when they sell goods at a premium to stores elsewhere in the country. It sounds obvious, but people who do not normally gamble will spend less in an IR than those who usually gamble. This means that operators, when running their numbers, need to factor in a lower proportion of visitors who fly in from other parts of Europe gambling in the IR, and when they do gamble, spending much less than their Asian or U.S. counterparts. This makes a sizable local population and a very large number of quality hotel rooms in the area all the more critical to the financial success of an IR. Someone once told me that you should not build an IR on the coast. The reasoning was that half the market would not be there. They were being facetious, but the point is well taken. Of the three IRs planned in Europe, I think the Mohegan’s Inspire project will be the most successful. Athens has a sizable local population with a high propensity to gamble, the tax rate is sufficiently low and there is a reasonable amount of quality hotel stock. Melco’s project in Cyprus is likely to struggle. It lacks scale and, with 500 rooms, is very much dependent on the local population and other tourists to the area. The local population in the addressable market is much smaller and the number of quality hotel rooms in the area is low. Additionally, tourism to the Island is high in the summer, but extremely low in the shoulder and off-peak seasons. Perhaps Melco will be able to fill the resort with high-spending Asian guests, but Asia is a long way away and the resort will not offer anything they cannot find closer to home. Hard Rock’s IR in Cataluña is some distance from Barcelona, almost 100 kilometres, on the other side of Tarragona next to one of Europe’s most successful adventure parks. The area is well served with accommodations, but again the focus is mainly on families, especially considering the adventure park next door. Hard Rock’s project will be part of something much greater, which will reduce their investment and increase demand, but I still believe they will be hard pressed to generate the returns necessary from the local population or the tourists in the area to get a return. And so, the answer to the question will integrated resorts be successful in Europe is: Provided the laws, regulations and taxes enable the development and operation of an IR, it will depend a great deal on where they are built.