Wynn Resorts, WalMart: One coin in the world economy

October 16, 2015

Oct 16 (Reuters) – Big fish Chinese gamblers afraid of a
corruption crackdown and poorly paid Walmart workers in the
United States might seem to have little in common.

But in the global economy, they are in some ways two sides
of the same coin, and to understand that is to understand more
than why the two disparate groups were blamed for horrendous
earnings at two very different companies: Walmart and
Wynn Resorts.

The globalization of the past 25 years has been kind to both
companies, as cheap labor from China became integrated in the
global economy, creating, among many phenomena, great new wealth
in China and a buyer’s market for labor in the United States.

Now we may be seeing the early stages of a partial reversal
of some of those trends, as China seeks a new economic model and
politics and economics in the United States are giving wage
earners more bargaining power.

Walmart’s stock is down more than 12 percent since it said
on Wednesday that earnings would fall 6-12 percent this year, a
decline it blamed in part on higher wage bills. The retailer
said in April it was bumping hourly pay up to at least $9 for
all U.S. employees, with another dollar-per-hour hike to come in
February. Overall, Walmart says it will spend $1.2 billion to
$1.5 billion on higher wages and training next year.

Wynn Resorts has a very different species of problem: too
few Chinese high-rollers willing to be seen betting fortunes on
the flip of a card. Not only are more gamblers now in fear of a
crackdown on corruption underway in China, but President Xi
Jinping’s efforts are creating a hostile environment for casinos
in formerly wide-open Macau.

“In my 45 years of experience, I’ve never seen anything like
this before,” Wynn CEO Steve Wynn said on Thursday, describing
the difficulty of what he called an “almost mystical” planning
process on the Chinese-administered island.

Wynn Resorts said profits fell more than a dollar per share
to just 86 cents, driven by a 38 percent fall in Macau revenue
and a near halving of the VIP junket business that brings rich
gamblers to the tables from the Chinese mainland.

Wynn shares, down more than 50 percent thus far this year,
fell sharply in Asian trading before recovering somewhat the
following day in U.S. hours.

BUSINESS MODELS

Gambling in Macau, to be sure, is particularly vulnerable to
a number of trends in China. Not only is an economic slowdown
hitting the cash flow of those who gamble, but the corruption
crackdown has taken particular aim at the industry. So-called
junkets, short trips to Macau, are seen both as a symbol of
corruption and a means for officials and others to launder cash
or simply to evade Chinese capital controls.

Still both businesses – Walmart and Wynn Resorts – had
business models that were part beneficiaries of and partly
predicated on long-running global trends.

As China rose, integrating its huge and underutilized labor
force into the global economy, its share of world trade rose
from less than 3 percent in 1990 to 12 percent today.
Great wealth was created, both in China and the rest of the
world.

Macau, gambling and Wynn all were beneficiaries of occupying
an intermediate space between tightly controlled capital and the
rest of the world. Gamblers had good reason not just to want to
live a little, but to want to get a bit offshore.

On the other side of the world, Walmart did well out of
selling goods, many of them made in China, cheaply to a middle-
and lower-income clientele whose incomes were being whittled
away in real terms as U.S. manufacturing jobs went offshore.
Those U.S. workers were both keen to find a bargain and, lacking
better-paid options, willing to work for comparatively little.

China now is at or past a demographic tipping point, with
little excess labor to absorb. The plan instead: to move toward
a more domestically focused, consumer-based economy. That change
ultimately may be successful, but in the meantime China sees the
need to crack down on arrangements and practices, like the
junkets, that it previously tolerated.

Walmart, conversely, finds itself also affected by the same
mega-trend of an aging China. Not only has U.S. unemployment
fallen, potentially giving workers more negotiating power, but
after decades of falling real wages, the U.S. political debate
has changed, with more pressure for higher minimum wages.

In other words, as surplus labor supply dries up in China
and elsewhere, largely for demographic reasons, business models
everywhere will come under pressure. Lower margins are likely
for labor-intensive U.S. companies, and the pie will be divided
differently, with different winners and losers in China.

(At the time of publication James Saft did not own any
direct investments in securities mentioned in this article. He
may be an owner indirectly as an investor in a fund. You can
email him at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)

(Editing by Dan Grebler)

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