Patience is a virtue. It also may be an investment for operators who stick it out in the unpredictable race to develop integrated resorts (IRs) in Japan.
Back in 2016, when lawmakers approved a plan for three IRs, global operators raced each other for a chance at the opportunity. CSLA analysts famously called Japan “a holy grail, given the market’s potential size” and estimated the industry could generate $30 billion per year—or more.
Those are Macau-sized numbers, and before long, the big guns were all in, opening offices in the markets of their choice. They included the Las Vegas Sands Corp., Wynn Resorts, Caesars Entertainment, Hard Rock and MGM Resorts International, along with Bloomberry Resorts, Melco Resorts and Entertainment, and Genting Singapore.
Starting in 2018, though, major operators started backing off, citing the high cost of business in Japan—including a multibillion-dollar investment and a 30 percent tax on GGR.
As Sands China President and COO Rob Goldstein observed at the time, “We’re used to writing big checks, but all that money on one IR makes you stop, pinch yourself and ask if you can get the returns your shareholders deserve.”
Wynn Resorts CEO Matt Maddox said pretty much the same, adding his company wouldn’t pursue the plan “if it doesn’t make financial sense.” Apparently, it didn’t. In 2019, both Sands and Wynn found the exit. That same year, Caesars Entertainment pulled out to focus on its U.S. operations and after a buyout by Eldorado Resorts, which has no international experience.
While a couple of big names remain—Genting and Melco in Yokohama, and MGM in Osaka—two smaller operators now have a lock on partnerships with local governments and will work with them in their bids to host an IR.
In June, a consortium led by Clairvest Neem Ventures, a subsidiary of Toronto-based private equity management firm Clairvest, was chosen in Wakayama.
And this week, Nagasaki selected Casinos Austria, operator of gaming venues in Biarritz, St. Moritz, Copenhagen and Cairo, among other jurisdictions. State-owned CA beat out latecomer NIKI Chyau (Parkview) Group, which didn’t enter the race until this year, and a joint venture of Mohegan Gaming and Oshidori International Development.
Oshidori had already announced it was dropping out, independently of its tribal partner, due to unspecified “unethical irregularities” in Wakayama’s RFP process. The Japan Times called its departure “yet another setback for the IR process, which has seen some of the biggest names in the business withdraw, citing issues with the regulation and proposed taxation.”
Those factors, plus a leisurely approach to implementation, prompted headlines accusing lawmakers of “cooking the golden goose.”
The companies chosen so far may not have the marquee appeal or global recognition of a Las Vegas Sands. But they have patience that may pay off over time.
“Japan by far is still one of the best opportunities out there, because you’re going into a country with a solid foundation—it’s a great place to do business,” said Brendan Bussmann of Las Vegas-based Global Market Advisors.
The Tokyo Olympics proved a showcase for Japan, but unfortunately a surge in Covid-19 infections hit people associated with the games; more than 430 tested positive, including several dozen athletes. Prime Minister Yoshihide Suga was slammed for his decision to go ahead with the event despite concerns it could become a super-spreader event.
“As it relates to Covid, I’ve used these two words since March 2020: unprecedented and uncertain,” said Bussmann. “Obviously, there’s still an ebb and flow to this, and it brings more uncertainty—none of us have ever really had to deal with this on this global scale.”
At this point, MGM stands alone in Osaka, having nurtured its relationship with the prefecture for years and declared its “Osaka-first” philosophy over the long haul. It’s displayed patience and long-term faith in the market.
Yokohama is more problematic. Galaxy Entertainment Group dropped out of contention in May, due to what it called a changing “world and business climate.” That leaves consortiums led by two mega-operators, Genting Singapore and Melco Resorts and Entertainment. Their interest notwithstanding, the whole project could hang on mayoral elections this month. Anti-IR candidates are in the majority.
“It doesn’t look good for a pro-IR candidate to win,” said Bussmann. “We have to first and foremost see who gets the nod and becomes mayor, then how they’re going to deal with very live RFP process between Melco and Genting. Maybe they’ll just say, ‘Hey, we’re going to blow it up, we’re done.’”
If Yokohama goes down, attention may shift to Tokyo, 30 miles to the north, said Bussmann. “I think there’s a good chance Tokyo would raise its hand this fall, depending on what happens with Yokohama.”
Of course he agrees the 30 percent tax rate is an obstacle. “Granted, you have the population there that helps mitigate that a little, but any time you have a tax rate at that level across the board on slots and tables, it’s difficult for any operator to make the numbers make sense. You could say the same thing about Chicago, which is a 40 percent effective tax rate. That’s why everybody’s pulled out of Chicago.”
The list of negatives in Japan is long, including Covid, closed borders and the time needed for economic recovery. The pro-IR prime minister may get the boot in November’s general election. For all that, Bussmann suggested that operators who persist in their efforts may be rewarded.
“There are growing pains because of Covid, and the process hasn’t turned out exactly as they wanted. The government may not name all three operators and leave one license open. They could choose only MGM. They could say, ‘We don’t like any of them, we’re going to scrap everything.’ Nobody knows how it’s going to shake out.”
Japan has the world’s third largest economy, and now teeters on the brink of recession. Given its abundant challenges, could gaming operators approved for IRs there find some B-version of the holy grail?
“I don’t think necessarily everything is the always the end-all and be-all. But the single biggest opportunity for Japan to be infused with capital investment in the country—pre-Covid or post-Covid—is the development of integrated resorts. Name me another industry that can come in and build three facilities that are worth billions of dollars each. There isn’t anything like it. I’d say it’s about as close to the holy grail as you get these days.”
