Mass moves margins, says Tracy

Edward Tracy, president and CEO of Sands China Ltd, has just delivered results for the third quarter (Q3) that show Macau’s biggest and most profitable company generating Ebitda of USD809m over the past three months. The result has come as a surprise for many analysts, as profit margins, at 35%, held up remarkably well amid a downturn in revenues since the previous quarter.
To Tracy, however, there is nothing surprising about the result. As he explains it, this business is all about focus: on the model, and on the people. Take care of the customers in the way they expect, give your staff the tools they need to achieve that, and the profitability follows.
It is more technical than that, of course, and so the CEO elaborates. “Margin management has two basic components,” he explains, “managing revenue mix and managing expenses.”
Given the transition that the market is going through, Tracy says, his management team has been making adjustments in both areas simultaneously. “We have been able to prepare for this change, and adjust our expenses accordingly, balancing them against the revenues that matter most,” he says, citing the practical example of how the company has been moving staff from VIP into the mass and premium mass segments, where margins are better.
“It is harder, of course, to identify expenses that are not part of our permanent cost structure and eliminate those in order to gain greater efficiencies,” Tracy continues. “But we started this process around 90 days ago and have been making good progress as a result. So the impact is being felt now and the margins are not deteriorating.”
What makes the company different than others, in being able to manage this change? Tracy is modest, but clear-sighted. “Our business model is slightly different than some of the other operators around town in that we are focused on mass,” he says. “We will continue to do the things that we have in the past, promoting entertainment, hotels, F&B, and retail, aimed right at those customers.”
That said, it is clear that Tracy has had to face up to challenges in doing this. “In order to make these kind of transitions when the market shifts, you have to not kid yourself about whether you are, or are not, supplying all the things those customers want,” he says. “So we are not doing this without scrutiny. But we feel that, looking five years out, this is still where we want to be – aiming for that rising middle class in China.
“The beauty of this business model is that it is so diversified, we are able to cater to such a wide range of tastes and spending brackets. Look at what we do with retail, for instance – it contributes US$2bn a year of revenue and around US$300m of Ebitda. This is important to our margin mix.
“Frankly, the way we feel about margin is that it is the ultimate measurement of our efficiency. The best thing we can do as a management team is to drive as many dollars as possible to the Ebitda line. Stock price and shareholder return on capital is all based on that, and that is what we try to focus on.”
At this, Tracy takes a pause, and extrapolates. “Obviously, if you are not doing the two most important things right first – providing your customers with the ultimate experiences and providing your team members with the right tools to succeed – then you will not be able to achieve that third thing, which is satisfying the profit objective,” he says. “We spend a lot of time trying to define that, and then to communicate that down to the frontline employees.”
This focus on the mass market is not always understood for its intricacy, and so Tracy takes time to define the segments within the mass market that he asks his teams to concentrate on.
“We like to talk about four distinct segments,” he says. “There is super premium mass, which is high level players who do not go through junkets and do not require credit. Premium mass players, meanwhile, are above-average players who have average daily theoreticals above US$5,000. And then we have the middle mass and what we like to call the ‘mass mass’, or the grind mass. These last two have numbers far in excess of the others. They are the deepest and widest part of the revenue pyramid.
“In order to service these people appropriately, you need a lot of capacity and a lot of content – all those things we do on a daily basis to entertain and engage our customers: shopping, dining, gaming, leisure, etc., all the elements of a great integrated resort experience.
“It is important to us that we deliver an experience across all of these categories, but also that we go deep into each, and cater to customers at every price point. We are going to continue to do that. When the Parisian opens up it will be a very differentiated product – again – and we are looking forward to introducing a new experience to the market.”Anthony Lawrance Special to MDT /Macau Inc. exclusive