With Britain’s B2 ban now formally enacted into law, Regulus Partner’s Dan Waugh explains that the first practical signs of impact are starting to be felt. So far, he says, these signs have been seen in machine contracts, rental pleas, horseracing funding and M&A – but what else will change come April 2019?
The most heavily analysed (and/or guessed at) impact has focussed upon revenue and shop closures.
We retain our view that c. 3,000 shops are likely to close as a direct result over the next c.three years (net of the c.500 already gone), with a further 1,000 put at high risk but potentially saved by the redistribution of footfall. This is likely to leave a c.£1bn hole in the £3.3bn industry, more than halving profits for the rump estates (indeed, the most profitable shops are likely to be the biggest EBITDA swing factors for estates: a £120k contribution shop could be reduced to c. £30k, whereas a £10k shop will simply close).We see no ‘hidden upside’ here for existing operators,with the industry’s track record on mitigation extremely weak since the fondly remembered (by too many senior retail managers) but largely irrelevant 1990s (we would also be surprised if more than £200m finds its way online – a c.3 per-cent potential remote boost likely lost in the roundings of slowing overall growth).
The biggest shock caused by April implementation will fall harder on the machine supply chain than the LBOs,in our view – and it is perhaps no surprise therefore that PP’s contract with Inspired .This is because while c.33 percent of an LBO’s revenue is being switched off, it is closer to 66 percent for the machine suppliers, largely on variable rates.Further,while shop closures can represent significant cost mitigation for estates, they represent a loss of revenue and a loss of servicing/replacement productivity for suppliers:the drip feed of closures across the country (on a month by month view) could make pro-active cost cutting very challenging, in our view.The hidden opportunity here is for strong B3 content,we believe – drawing on a materially wider supply chain than current B2/3.
Operators are already hoping to pass on some of the pain, with William Hill reportedly writing to landlords explaining the issue and hoping for flexibility. Landlords (as a group) have done pretty well out of LBO clustering onto the high-street and away from tertiary locations; but estates with strong locations have managed LfL property costs well -WH’s property cost CAGR is only 1.6 percent in 10 years (on an almost identically sized estate). Equally, the loss of c.1,000 retail premises per year out of a system already losing c. 6,000 pa is only likely to make a difference at local levels. It is of course logical to ask, but rental mitigation is likely only to occur where there is a bigger long-term problem: lower retail footfall.
Racing is a big cost centre to LBOs, with a total content cost ofc. £30-35k per unit, largely fixed, and with horseracing representing the majority of this (just) – with costs increasing above inflation for a decade while retail revenue from racing decreased. In other words, racing has been a big beneficiary of FOBTs, albeit not in a directly planned manner. The fixed cost per shop model is showing signs of creaking (eg, theTRP-LCL deal),but remains the standard model – a model which is likely to force more closures and therefore reduce racing’s income even more than the resultant loss in over- all retail racing revenue (the Levy,as a volume measure,is much more protected from disruption).This pressure has already caused ARC to announce a cut in Prize Money of £3.1m next year (potentially leading to £4m more if BHA rules on match- ing are followed), while the Jockey Club has announced no increase (for the first time in 10 years), with a possible reduction if the FOBT impact is worse than expected.Given that ARC is a commercial organisation that will not comfortably run at a loss – and is also (far) more reliant on media rights than courses with higher quality races (non-levy and media revenue per fixture is only c.25-30 per- cent that of the Jockey Club) – this reaction is both logical and predictable (however “disgusted”some stakeholders may feel).However,ARC’s ‘decision’ (Hobson’s choice) is likely to hit the lowest value races hardest due to the nature of ARC’s fixtures (which are in turn more relevant to bookmakers than horsemen or racegoers) – making relatively small changes in the scheme of things (c. 2-5 percent of a system-wide prize money pot that has shown healthy growth) have a disproportion- ate impact on elements of a fragile ecosystem. Herein lies both a problem and a potential answer – if funding for the bookmaking product unravels the fastest, it might either accelerate the demise of both retail bookmaking and ‘race- to-race’ punting; or lead to some much-needed creative thinking (the jury is still out on which way this goes).
Finally, some silver lining (of sorts). BoyleSports has confirmed that it is in advanced talks to acquire its first UK LBOs. BoyleSports is used to a highly competitive and completely betting oriented shop landscape in Ireland (the proving ground of PP) – that it feels that is can create a business amid the chaos (and let’s not forget Brexit for an Irish business as well as the B2 ban), rooted in what betting shops were originally for, should give some hope that the LBO is not dead – though whether this hope is worth anything more than a further threat to UK majors which have spent a management generation growing fat off FOBTs to the near total neglect of betting (ex SSBTs) remains to be seen.