Tottenham Report: Integrated Resorts 101

May 20, 2024 11:00 PM
Photo: Shutterstock
  • Andrew Tottenham — Managing Director, Tottenham & Co
May 20, 2024 11:00 PM
  • Andrew Tottenham — Managing Director, Tottenham & Co

I have read a few articles recently about an integrated resort opening soon or at some time in the future. I have also seen feasibility studies that show astronomical levels of revenue. But are these really integrated resorts? 

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I believe the first time “integrated resort” was used was to describe Marina Bay Sands. The late Sheldon Adelson wanted to convey that his vision for Marina Bay was not a resort with a casino, but a resort where every element drove demand for the resort and the proximity of each element to each other would create internal demand. 

Customers come and stay in the integrated resort, thanks to the range of amenities. They stay in exceptional rooms, eat in top-notch restaurants, see a show, gamble in the casino, enjoy spa treatments, and make some purchases in the retail area. 

Integrated resorts cannot be built anywhere; the economics would not work. For a 1,200-key $2 billion IR (including land cost), the casino will generate 70% or more of the EBITDA and the cost to construct and fit out the casino “box” is probably around 25% of the total cost.  

To produce an adequate return on the $2 billion investment, if we assume a margin of 40%, the IR will need to generate $750 million of annual revenue, approximately $625,000 per key per year or just over $1,700 per key for every night of the year.  

This hypothetical IR, operating with a 75% year-round occupancy rate and an average of 1.7 guests per room, will host an average of 1,530 guests per night. This is not the same as 1,530 new guests per night, as most will stay longer than one overnight.  

With an average length of stay of three nights, each guest would need to spend over $4,000 during their stay for the investors to make an adequate return on their investment. That is a very tall order. 

Luckily, IRs do not depend solely on hotel guests, but can attract visitors coming from other hotels in the vicinity or people living locally. It is important to remember who those people are and what the other hotels are.  

In the UK, less than 3% of the adult population visit casinos and those that do, if we exclude London, spend an average of $50-$60 per visit. In France, the figure is around $80.  

It is true that people’s velocity of spend is higher on vacation. Think about how people spend more on things at airports than they ordinarily would and on things they could quite easily get in shops on their high street. Possibly, they would spend more in the casino that usual. 

Sharm El Sheikh used to attract around five million tourists annually, before terrorist bombs reduced the number dramatically. Sharm was known for attracting mainly Brits and Russian tourists, who stayed in “all-inclusive” hotels. All-inclusive means everything; food, drink, and some entertainment are paid for in the fixed price of their holiday. The average spend per tourist in the casinos in Sharm was $10. 

If there are insufficient numbers of high-spending tourists in the area and if the season is short, the resort will have to rely on locals. Remember, in Europe, no one is very far from an existing casino. Gamblers are attracted to the most convenient location. Non-gamblers do not spend much when they visit a casino. It is rare that a person will travel a greater distance to go to a casino when there is one closer, unless there is a compelling reason.  

Mississippi was a great example of this. When riverboats casinos were opened in 1992, the first to open enjoyed success. But when one opened closer to the main metropolitan market, the existing casino’s revenues plummeted overnight. 

True, a modern IR might have an exceptionally high-quality well-designed casino, but is that enough for someone to spend an extra 30 minutes or more travelling each way? 

That is why the most successful IRs are in locations where gambling is not otherwise legal and in close proximity to countries where gambling is not legal. 

If you build it, they might not come.