The Future of Retail Betting - February 2010

The future of retail betting will be framed in the short term by how the government deals with fixed odds betting terminals (FOBT's) and in the long term by the diminishing interest of punters in the traditional core betting products of horse and dog racing. While traditionally one of the most politically effective sectors of the industry, this author believes that they may well have have achieved an apex in what they can get out of gambling liberalisation and that the sector will need to start lobbying for changes to the way they are allowed to sell their products.

Fixed Odds Betting Terminals have led a charmed life so far. Developed at the turn of the century as a result of a legal ruling that gave more clarity to what actually defined a bet, they almost instantaneously outraged the land based gaming world by offering roulette in betting shops. The Gaming Board for Great Britain (an effective regulator of the day) were certain that 'if it looks like a duck and it quacks like a duck' then it was an illegal casino game in an LBO. However the government's legal advice was not so sure and the bookmakers rather wisely, offered to do research into their impact and developed a code of conduct for them which could only salve any fears about problem gambling.

So FOBT's could stay and immediately became the biggest hit in the betting shop. Ladbrokes retail turnover doubled between 2002 and 2003, by 2005 the average weekly gross win per FOBT was £545 and by 2008, machine gross win was 58% of OTC (over the counter) gross win. William Hill is similar with, in 2008, machines accounting for 52% of OTC gross win and each of their machines providing a net contribution per week of £529. Then came the British gambling prevalence study in 2007, which highlighted that the gambling activity second most likely to be used by problem gamblers was FOBT's (11.2% of problem gamblers using them). Little was made of the fact that the number one problem gambling activity was Spread Betting (14.7%) which is regulated by the Financial Services Authority, which has no apparent remit to deal with problem gambling, but it was enough to spur the gambling minister to initiate research into the impact of high-stake, high-prize gaming machines on problem gamblers.

By the beginning of the autumn 2009, the Gambling Commission was still undertaking research. Its initial findings had been inconclusive, there being a lack of available and relevant data (the UK is unique in having FOBT's), but this author wouldn't be surprised if in the near future operators are asked to adopt the South African approach of having to have smart card readers attached to each machine. These smart cards track individual players play and can, with the use of the right algorithms, identify when a player shows problem gambling behaviours. The upside for the bookmaker is not only can they say that it’s the computer who thinks the punter has a problem and not them, but that if integrated as part of a complete player tracking system, they can for the first time fully understand their anonymous cash only players. This author believes that if there was an industry-wide system; cost could be reduced and the benefits of customer intelligence enhanced as a full player picture could be built up – betting shop punters usually frequenting more than one brand of shop. The threat of the government bringing in more restrictive play measures to counter problem gambling still hangs in the air, but a) these will only reduce tax revenue – something nobody will want to do over the next decade, and b) there is no scientific evidence as to what effect these measure have – so how would anybody know how much to slow a game down by?

The biggest immediate threat comes from the fact that in July 2009, the Treasury initiated a consultation into moving gaming machines from the present tax regime of AMLD licences and VAT to one of Gross Profit Tax. The logic behind it is infallible and we can be certain it will happen. What rate of tax? One can only suppose that Bingo's recent rise to 22% could be the new level for all gambling taxes, as much as this author would like to believe that tax rates are worked out economically, the political case will always win – the Treasury coffers are empty, having the same tax rates in each sector implies equitableness and tax hikes on the industry having little political cost, so 22% is logical and highly probable.

The case for a tax rise is further bolstered by the impression that the move by William Hill and Ladbrokes offshore has not gone down well on either side of the House nor with the Treasury. It was quite an explicit gentleman's agreement that when the betting tax regime changed in 2001 from GBD to GPT, that the 'big three' would stay onshore. This was of course before Gordon Brown set the Remote Gaming Duty at 15%, over 10% higher than any other major internet jurisdiction and when you consider these jurisdictions aren't charging corporation tax or NIC, then the difference is enormous. So on one side you have the bookmakers in international competition being hampered by onerous tax rates in the UK and on the other, you have Whitehall feeling that an agreement has been broken and that this is an industry that can easily provide more tax revenue.

The truth of the matter is that many betting shops contribute only marginal profits, anecdotal evidence suggests that there could be as much as a factor of ten between a high performing shops and low performing shops, so if the government decides to squeeze on FOBT's or GPT or both, many of these shops will simply be closed down. This will not only mean unemployment for the staff (whose skill base it not easily transferable in a recession) but also raises the spectre of illegal gambling. If a community loses it local betting shop then it won’t be long before someone sets up illegally in a local pub. This not only reduces tax revenue but opens up punters to a world of criminality, where credit for gambling and the pathway to other externalities exist. Government should never forget that the biggest lobbyist for the legalisation of betting shops was the Association of Chief Police Officers, who had enough of the corruption and criminality that widespread illegal bookmaking caused. People will always want to bet and when the government makes it commercially impossible for betting shops to exist, criminals will fill that gap.

Betting shops will survive, but the betting shop of the future will not be the same as now. It can't be. For the short term reason that the middle aged and older man betting on horse and dog racing is a dying breed. Not that this will happen immediately, but soon bookmakers will have to question why their shops are built around a horse and dogs product offer. Nick Rust, head of Coral bookmakers, stated at a recent ROA AGM that their market research showed that only 4% of new customers to a betting shop were brought in by horseracing. This is hardly surprising considering the decline in horseracing's popularity around the world. Why? Because quite frankly, it’s too complicated a product compared to casino style games, betting on whatever team you support and not as culturally popular as it once was – young people are coming into betting shops to play the FOBT's and bet on football. Horseracing has not managed to keep up with the times. When John McCruick has the highest name recognition for your sport than you should know you have problems!

Betting shops will, at some point, have to segment their customers. The present generic product offering based on horses and dogs with FOBT's, will only have a diminishing appeal to new generations of punters and will act as a deterrent to potential new user groups. Much in the same way that pubs realised that by segmenting their customer base and developing pub formats accordingly was the way forward, betting shops will need to do the same.

All Bar One changed the face of the British pub industry by breaking the mould of what was once a very generic offer; male dominated, minimal food and vertical drinking. All Bar One developed a food and wine led concept and made it female friendly by having an emphasis on sit down food and drink, large open windows so unaccompanied girls could see what they were going in to and a more bistro atmosphere. Now there are many types of pub, that offer different environments, product ranges and price points; community pubs, circuit pubs, food-led pubs, music-led pubs etc. For betting shops to survive there has to be a realisation that the traditional core customer base is diminishing and new customers will only cross the threshold if the format fulfils their needs. This will mean that some betting shops will still cater for the horses and dogs punter and some will cater for football and FOBT's. Some will be designed around attracting women (they are 50% of the population and have been known to like a flutter) and some for those who want to bet on sports you bet on while in running, like golf, cricket and snooker. There will even be some pubs that cater for those who want to bet on politics and celebrity gossip – who knows, entrepreneurial creativity is not in short supply in the gambling industry.

But the major short-medium term problem for betting shop operators is that it won’t be long before everybody has large screen TVs in their homes which will have the internet being delivered at 100 Mbps speeds. When punters are being offered a fully interactive experience in their living room with some beautiful Lithuanian girl enticing them to gamble there and then, why will they take a trip down to the high street?

The answer has got to be that betting shops, of whatever type or niche, provide a locus of social interaction, a meeting place for those interested in gambling, the majority of which is betting on sport and events. This however goes against the grain of the way betting shops have always been regulated. When they were legalised, they were specifically not to offer any other amenity than betting. R.A. Butler, Home Secretary at the time, wanted the punter to leave a betting shop feeling like he had just left a brothel! No one is asking for betting shops to be able to offer those kinds of facilities, but in order to compete with the punters living room, betting shops must be able to offer more than the pre-packaged food and hot drinks that is legal now. 

This author believes that betting shops have to be able to evolve into a much more sophisticated entertainment offer than is currently allowed and that, in some cases, alcohol as well as hot kitchen cooked meals should be allowed. Alcohol and gambling is frowned upon, yet is allowed at the race track, the bingo hall and the casino. In many countries around the world and especially in Europe, the norm is not a betting shop, where all you can do is gamble, but a betting terminal in a bar or café, the idea being that your betting is just a part of a bigger, social leisure experience. With Smart Cards enforced on all punters, their gambling can be monitored for problem gambling behaviour, thus highlighting those who need help, while allowing the majority to enjoy themselves in a safe adult leisure socially interactive experience. Lobbying for a change in what non-gambling products can be offered in the future, may well be far more politically acceptable than the usual requests for more gambling and may well increase punters and increase dwell time and spend.